Professional Ethics and Auditor's Legal Liability

Case 1: Ethical Issues

The following involve Lola Payne, an audit senior with the Accounting firm of Joyce & Mark. She is involved with the audit of Dockland Ferries Ltd(Dockland).

1.The assistant accountant of Dockland resigned 6 months ago and has not been replaced. As a result, Dockland's transactions have not been recorded and the accounting records are not up to date. To comply with the terms of a loan agreement, Dockland needs to prepare interim financial statements but cannot do so until the records are up to date. The managing director of Dockland wants Lolato help them out because she performed the audit last year. The audit partner of Joyce& Mark allows Dockland to use her for 1 month before the start of the annual audit

.2.During the annual audit of Dockland, Lola discovers Dockland had materially misstated profit after tax on the previous year's tax return. The client is unwilling to take corrective action. Lola decides to inform the taxation office

.3.On completion of fieldwork of the audit of Dockland, Lola is offered a six free ferry tickets by the managing director. He tells her this gesture is meant to show his appreciation of a job well done. Lola accepts the tickets

.4.The partner of Joyce & Mark is not pleased with the time Docklandis taking to pay its audit fee fo rthe year. He decides to take $5,000 out of a trust fund that Joyce & Mark holds for Dockland. He intends to replace it as soon as the company pays its audit fees

.Required

For each of the previous four situations, -identify the ethical issues involved, and -discuss whether there has been any violation of ethical conduct. Support the answers by reference to the relevant professional statements.

Case 2: Liability to the shareholders and the company

Maxref ltd is a new dot.com company specialising in online trading in multimedia items such as DVDs. Music,online reports,and celebrity commodities. It has been listed on the Australian Securities Exchangesince last year. As auditor of Maxref' sfirst year'sfinancial statementsfor theyear ended 30 June 2009, you note that the accounts show a turnover of about $10 million, shareholder's funds of $2 million, and a profit before tax of $250,000. During the course of your audit you discoverthatthe balanceof thesales ledger control account is $500,000 and that about 80% of theaccounts receivableare from new customers who bought items online without full details of the bankingparticulars. You furtherdiscover that all online transactions were reported and executed without proper securitychecks. Moreover, halfof the items listed as stock for sale cannot be located. The share priceof thecompanystands at $1.50. You raisetheissue with the director of Maxref and he tells you that this is no uncommon with this typeof e-business and that he is concerned only thatthe AustralianSecurities Exchangeallows it to go on trading. He assures you that nothing major will happen; an unqualifiedauditor'sreport its all that is necessary. However, you are worried about your own ability

.Required:

Discuss the potential liability of the auditor to the shareholders and the company