Syafiq Sdn. Bhd. was recently declared bankrupt as the company was unable to pay its mortgage loan of RM6 million. It was discovered by the liquidators of the company that the assets had been overstated by RM0.5 million as a result of fictitious non-current assets being recorded in the financial statements. The liquidators of Syafiq Sdn. Bhd. is now suing the auditor, Hasyim & Co, for breach of contract and negligence.

The liquidator argued the auditor has not carried out adequate procedures to verify the non-current assets and had relied mainly on the management’s non-current assets schedule. However, the auditors claimed that they are not liable for the loss because the loss was not caused by their negligence and the duty to detect any fictitious transaction is not part of the contract.

Required:

Discuss whether the auditor had been negligent in the audit of Syafiq Sdn. Bhd. that led to the bankruptcy of the company.

In completing the audit, the auditor considers a number of additional audit issues such as opening balance, comparative figures, accounting estimates, and related party transactions that do not normally pertain to specific business processes or financial statement items.

i. Explain what is accounting estimates and how it affects the financial statements.

ii. Explain the audit objective and audit procedures for the audit of related parties transactions.