QUESTION 3

Chan & Soon, audited the accounts of Jakel Sdn Bhd, a boutique. Upon completion of the audit, the auditors issued 15 copies of the audited financial statements. The firm is aware that Jakel Sdn Bhd wanted that number of copies of the auditor's reports to furnish to banks and other potential lenders. The balance sheet in question was misstated by approximately RM500,000. Instead of having RM320,000 net worth, the company was insolvent. The management of Jakel Sdn Bhd had altered certain financial disclosures in the books to avoid insolvency. The assets had been overstated by RM300,000 of fictitious and non-existing accounts receivable and RM400,000 of non-existing outfit listed as inventory. The audit failed to detect these fraudulent entries. Mr Chee, third party, relying on the audited financial statements, loaned Jakel Sdn Bhd RM100,000. He seeks to recover his loss from Jakel Sdn Bhd and the auditors.

Required:

Answer the following, giving reasons for any conclusions stated:

1. If Mr. Chee sues the company and the auditors, what will be the basis of his claim?

(5 Marks)

2. What are the probable defences that might be asserted by Jakel Sdn Bhd in light of these facts? (5 Marks)