Music Planet Limited has had declining sales as more and more media are being presented online rather than on CD or DVD. It diversified its business by moving into backup systems but is still having trouble boosting income.

The audit team was led by Mina, who obtained her CPA last year. Mina had two assistants, Mark and Ubaid, who did the work in the accounts receivable and inventory areas. Mina felt that they did not require supervision, as they had been with the firm for two years and were expected to do well on their professional exams this year. Mark found that the accounts receivable had many old accounts and customers were difficult to contact. Accordingly, he decided to accept management's representations with respect to the balances. Similarly, Ubaid noted that there were still many CDs in inventory that had been there for over three years. Management insisted on recording these at cost. Ubaid accepted management's valuation.

Two months after the audit report was issued, Music Planet Limited went bankrupt. It was found that many accounts receivable were for fictitious customers and the receiver was only able to obtain five cents on the dollar for the inventory, which was sold as scrap.

The bank is suing the auditors to recover its bank loan, which had been renegotiated based upon the results of the financial statements.

Required:

Will the bank be successful in its suit? Why or why not?

Case Two:

M & H Chartered Professional Accountants is a Milton basedaudit firmowned by six partners. Assume you are one of the partners at M & H Chartered Professional Accountants (audit firm), and you are dealing with various situations in relation to your firm's audit clients.

You are about to sign engagement letters with the following clients for the audit of financial statements.

Situation 1 - EC Ltd.Your firm has recently completed the project of designing & implementation of accounting & bookkeeping system for your client EC Ltd.

Situation 2 - FD Ltd.The chief accountant of FD Ltd (one of your clients) has just been retired and not been replaced yet by the HR. As a result, there is no one heading the accounting department. The financial yearend is approaching in a couple of days. The CEO of FD Ltd has asked you if the senior auditor in the audit team can help him calculate the corporation tax and file the tax return (for which he will pay some extra amount in "cash" to the audit team members.

Required:

For each situation, explain:

a) The ethical threats to auditors' independence in general and specifically in context of these situations.

b) The necessary safeguards which you think should be in place (by assuming your firm wanted to continue with these clients, initially).