Question

You are the audit manager of BGM Malaysia. You have attended a monthly meeting of audit partners and managers at which client-related matters were discussed. The following were discussed in the meeting. The audit report on the financial statements of Mazar Bhd, a long standing audit client, for the year ended 31 December 2020 was issued in April 2021, and was unmodified. In May 2021, Mazar Bhd's audit committee contacted the audit engagement partner to discuss a fraud that had been discovered. The company's internal auditors estimate that RM 4.5 million has been stolen in payroll fraud, which has been operating since May 2020. The audit engagement partner commented that neither tests of control nor substantive audit procedures were conducted on payroll in the audit of the latest financial statements as there were no deficiencies found in controls over payroll in previous years' audit. The total assets recognized in Mazar Bhd's financial statements at 31 December 2020 were RM 80 million. Mazar Bhd is considering suing BGM Malaysia for the total amount of cash stolen from the company, claiming that the audit firm was negligent in conducting the audit.

Required: a) Explain the matters that should be considered in determining whether BGM Malaysia is liable to Mazar Bhd in respect of the fraud. (10 marks)

b) Explain actions that the auditors could have taken to prevent such a legal action from arising (6 marks)

c) Auditors of financial statements has a fraud detection responsibility. Discuss (9 marks)