You have just joined Docile and Co., an audit firm as Audit Manager.

Docile and Co is in reality a three-person practice, The Audit Partner is a Mr. Donald Docile, who has been auditing businesses in the local town for 50 years. He is considered by locals to be a very nice man with a strong reputation for honesty.

On your first day of work, you attend the office to find it in a state of turmoil. You ask what is wrong, and are told one of the previous audits overseen by the person you replaced as audit manager had resulted in the issue of an inappropriate opinion. The audit manager had made a mistake. It appears that while auditing Beta Tools, the previous audit manager, rather than visiting a warehouse located 600km away, had accepted a certification by one of the company directors that a material amount of stock as stated on the stock report was held at that warehouse. In fact the warehouse was empty. Beta Tools had gone into receivership a few weeks ago. The solicitors for the receivers had just sent a letter to Docile and Co. demanding that they reimburse the company the value of the missing stock.

Mr Docile asks you to urgently draft a short report to him setting out the possible liability and reasons.

Question 1

Required:

Set out in a brief report to Mr Docile the legal liability situation for Docile and CO as you see it. Quote case law where applicable. (5Marks)

In late April, Mr David Diffident, the Chairman of the Board of DMC Trading Ltd (DMC) a Wholesale business with three warehouses approached Docile and Co to conduct the audit of DMC. Mr Diffident explains that the previous auditor was too expensive, and they are looking for a more economical audit, and are putting the audit out for tender. Mr Diffident asks Mr Docile to quote for the audit. Mr Docile asks you to undertake the preliminary review in preparation for making the quote.

As part of your review of DMC you undertake enquiries of businessmen in the neighbourhood. There is nothing directly adverse known about DMC, however there is a rumour that is circulating that Mr Diffident ran a factory for some years in another state. Further enquiries indicate that this factory failed about fifteen years ago, and rumour has it that Mr Diffident was the main cause of the failure.

On behalf of Mr Docile, you approach Mr Diffident to obtain a letter of authority addressed to the previous auditor to discuss the audit history with you. Mr Diffident explains that he is very disappointed with the previous auditor, and as a result he will not correspond with him at all. On being told this, Mr Docile says the previous auditor was an expensive clown and Docile and Co. will do a much better job than the previous auditor and advises that the audit is to be accepted.

Question 2

Required:

Should Docile and Co have accepted DMC as a client? If not why not? If so, why so?