Reference no: EM132892288

Question - The public accounting firm of Bonner & Irvine conducted the audit of the general purpose financial statements for the period ending 30 June 2016 for Melanos Ltd. The client is a shoe manufacturer and importer, selling wholesale to a number of large retail outlets such as KMart and Aldi under their store brands. The audit partner recruited two recent accounting graduates to perform the audit as he was busy on another engagement. After reviewing some of the audit file, he gave Melanos Ltd an unqualified audit opinion in August 2016.

In May 2016, Collinear Ltd began preparing for a takeover bid for Melanos Ltd by purchasing a small parcel of shares in Melanos. Then in October, based on information they found in the general-purpose financial statements a full takeover was launched. On December 14, 2016 Melanos Ltd was placed under administration when the firm became insolvent.

The administrators discovered that Melanos Ltd had falsified inventory records to overstate assets and also double counted sales over the previous 18 months.

Collinear Ltd is now suing the auditor and management for the value of the shares they purchased.

Is the auditor liable to Collinear in this situation? Select the most appropriate option/s from the list below.

a) The auditor is liable to Collinear because they were negligent and failed to detect the overstated assets and sales

b) The auditor is not liable to Collinear because a duty of care is not owed

c) The auditor is not liable to Collinear because management falsified records

d) The auditor is liable to Collinear because a duty of care is owed

e) The auditor is liable to Collinear because by providing an unqualified audit opinion, they presented the company as a well performing entity and therefore a great investment