Assessment Task 3(b) Requirements

(Adapted from Leung, Philomena. (2009) Modern Auditing & Assurance Services, 4th Edition. John Wiley & Sons Australia, pp. 155-156).

You are a trainee audit staff member of the engagement team appointed to conduct the audit of Michelle Mountain Jewellery Ltd. On the day of the stocktake, your audit supervisor (Monica), was taken ill. Monica told you that while she could not attend the stocktake: There should not be any problem. The stores people are pretty good and figures in the stock count sheets have always been properly prepared. You attended the stocktake alone and thought everything went well, at least for your first time. The stock count sheets were prepared and stock was stated at $850,000. Monica reported the figure as correct and the accounts were signed off by the Directors and your engagement partner as showing a true and fair view. Three months later, Michelle Mountain Jewellery announced bankruptcy because it was unable to pay its bank loan on its mortgaged property. The liquidator discovered that the majority of the stock held by Michelle Mountain Jewellery was either broken or counterfeit, and the real value of the entire stock was adjusted to $200,000. Moreover, the liquidator questioned the conduct of the audit which had just been completed. Required Discuss the potential liability of the auditor to their client. This means you need to include in your discussion: the influence of relevant legal cases and applicable auditing standards

to your decision about whether the auditor would be able to demonstrate they have exercised due skill and care in the conduct of their audit. In other words, your discussion should indicate those legal cases that set out how the exercise of due skill and care is determined by the courts and those auditing standards you believe have or have not been followed in this scenario.