Reference no: EM133129717

Questions -

Q1. You have been the in-charge on the audit of Crake Storm for the last two years and you have built up a good professional relationship with the Finance Director, Cynthia Plant. She has been very happy with the professionalism and efficiency with which you and your firm have carried out the external audit. Cynthia is currently conducting a review of the company's internal audit department and has asked for your thoughts on your firm carrying out this work.

Required - Prepare notes for a meeting with Cynthia Plant which highlight the advantages and disadvantages of the external auditor conducting internal audit work.

Q2. Sonny Manufacturing Ltd sought a $2 million loan from Bank of Australia. The bank insisted that audited financial statements be submitted before it would extend the credit. Sonny agreed to do this and also agreed to pay the audit fee. An audit was performed by an independent qualified accountant who submitted his report to Sonny to be used solely for the purpose of the loan negotiation with the bank. The bank, after reviewing the audited financial statements, decided not to extend the loan to Sonny. The bank had been using some ratios from the financial statements and decided they were too low. Sonny used the financial statements to obtain a loan from another financial institution. However, it was subsequently discovered that the auditor had failed to detect a significant embezzlement by a senior manager at Sonny.

Required -

a. What are the liabilities, if any, of the auditor? To whom is the auditor liable?

b. What factors should appropriately be considered before the auditor's liability is confirmed?