QUESTION 1 The following are TWO INDEPENDENT situations: Situation 1 You are Audit Partner of Jacob & Associates (Jacob) assigned to the audit of Gold Mines Ltd (Gold). You issued an unqualified audit report for the year ended 30 June 2021. In December 2020, five employees of Gold were charged with systematically and deliberately entering fictitious transactions and embezzling about $30 million. Your firm has been notified by the lawyers of Gold that they are taking legal action against your firm based on the audit for the year ended 30 June 2021. They claim that you and your audit team were negligent in conducting the audit due to your failure to identify fraudulent activities of the employees of Gold. Required: Based on the relevant case laws and auditing standards: (a) Discuss the major issues to be determined in deciding whether the Gold was guilty of contributory negligence. 3.0 Marks (b) Explain and develop the best defence for Jacob against the court action taken by Gold. 3.0 Marks Situation 2 Your audit firm Balance & Co, (Balance) has audited the financial report of Metro Finance Services Ltd (Metro) for the year ended 30 June 2018, 2019, 2020 & 2021. Every year an unqualified audit report was issued. Metro promoted investments in a number of property development projects, including 10 projects using unsecured mezzanine finance ie. fundraising that covers the difference between what banks are prepared to lend and the actual cost of the project. In July 2021, Metro went into liquidation. As a result, thousands of investors lost their savings and retirement funds in the order of $1 billion. Investors have launched a class action against Balance claiming that the audits of Metro were negligently carried out as it failed to identify issues relating to continued solvency and qualify the audit reports. Required: Based on the relevant cases laws and auditing standards: (a) Evaluate whether the auditor owes the investors a duty of care? Give reasons for your conclusion. 3.0 Marks (b) Discuss whether the investors are likely to be successful in their legal suit for negligence against the auditor. 3.0 Marks TOTAL 12.0 Marks 2