Subject : Auditing

Topic : MIA BY LAWS /LEGAL LIABILITY/GOVERNANCE

B. Nik, Nur and Co. audited the accounts of Top Batik Sdn. Bhd., a textile company. Upon completion of the audit, the auditors issued 15 copies of the audited financial statements. The firm is aware that Top Batik wanted that number of copies of the auditor's reports to furnish to bank and other potential creditors. The statement of financial position in question was misstated by approximately RM700,000. Instead of having RM1.2 million net worth, the company was insolvent. The management of Top Batik had altered certain financial disclosures in the books to avoid insolvency. The assets had been overstated by RM400,000 of fictitious and non-existing accounts receivable and RM300,000 of non-existing textiles listed as inventory. The audit failed to detect these fraudulent entries. Mr Gan, relying on the audited financial statements, has supplied Top Batik RM500,000 worth of textile on credit. He seeks to recover his loss from Top batik and the auditors. Required: Discuss whether Mr Gan will recover his loss from Nik, Nur and Co. Support your arguments with relevant legal cases. (8 marks)