AUDITING

Audit Negligence

Table of Contents

Introduction1

Highlights of the important points of the case given above1

Liability of auditors2

The loss4

Common Law5

Conclusion7

References8

Audit Negligence

Introduction

Audit may be defined as the evaluation of a legal entity. This could be a person, organization, product or even a process. The case presented is one of accounting audit. When it comes to accounting, we need to understand what the purpose of the audit is and what the expectations from the audit are. When these expectations are not met, it is termed as negligence on the part of the audit firm. Negligence as a legal term may be defined as the breach of duty, which can result in harming the person or entity which hired the services of the audit firm or any other person. Negligence takes place when the audit firm does not pay adequate attention to anything or overlooks anything or simply is careless when it comes to their duties (Poorter, 2008, p. 8). This carelessness can harm either the company that has hired the services of the audit firm or the customers, shareholders, consumers of the products and services of the firm and the community at large.

Any victim of negligence under the law is entitled to make a claim on the firm or person responsible for negligence. When the negligence is too bad to be tolerated at all then it is termed gross negligence (Corporate Crime Reporter, 1987, p. 1).

Highlights of the important points of the case given above

The important points of the case are summarized hereunder.

The annual income of Rayne Looney is £50m.

He is the sole shareholder of Looney Supernova Ltd.

Fred Flintstone is the agent of Rayne Looney through the Flintstone Enterprises Ltd.

A quarter of Looney's gross earnings is paid to Flintstone Enterprises Ltd.

The accounting staff and systems for Looney Supernova Ltd. and Flintstone Enterprises Ltd. are the same.

The average cost is about £2 million for the shared resources and responsibilities.

The above cost of £2 million will be shared between the two companies based on the turnover of the two companies and the level of media engagement of Looney.

The formula was such that the engagement of Looney meant offsetting the cost for the Flintstone Enterprises Ltd.

Beanos & Co. was appointed to perform the audit for the year and preparing the financial statements for the two companies.

The new accountant who was supposed to divide the cost between the two companies remained uninformed of the predetermined formula for the separation of costs.

In the following year, the earnings and engagements for Looney declined considerably.

£1.5 million was charged to Looney Supernova Ltd. over a period of four years owing to the negligence of the accounting firm Beanos & Co.

The audit reports issued for the past four years were unqualified.

Liability of auditors

The litigation against Beanos & Co. should be filed in accordance with the liabilities of the auditors. This liability has changed over time in three ...