Harrison, Fisher, Hamill (HFH) is Australia's largest regionally-based professional services firm with offices in all major regional cities. It's early February 2022 and an audit team led by Paddy Nets, a senior HFH partner with 19 years of experience, is meeting to discuss issues with current and former clients.

Question 1. Bubblehike Furniturenegligence

Bubblehike Furniture Pty Ltd (Bubblehike) had been a well-regarded family-owned business with stores across Central and Southern NSW. Not only did HFH undertake the annual financial report audit for over 20 years (most recently for the 30 June 2020 year-end) but it regularly provided non-financial reporting services such as tax advice, market appraisals, and e-commerce consulting. In January 2021 Heifer Homewares Ltd (Heifer), a large multi-national company, bought a 90% stake in Bubblehike. After the deal had been finalised, Heifer's internal audit team discovered that Bubblehike's inventory was significantly overvalued which led to Heifer making a much higher offer than it would have otherwise.

Heifer recently began court action against HFH for the losses it has allegedly incurred due to the inventory overstatement. In preliminary hearings, it was established that HFH relied on Bubblehike management's representations about the value of the inventory. It also became clear that a large amount of the inventory balance consisted of lounges that had not sold for more than two years due to changes in consumer tastes and that millions of dollars in defective beds and mattresses had not been written off by Bubblehike warehouse managers.

Required

With reference to relevant audit standards and case law, assess whether:

1. HFH has been negligent in their audit of Bubblehike
2. Heifer will win their case against HFH.
3. an Active Data analysis command may have identified the overstatement issues