Reference no: EM133096762
Question - Shin Chan Factory (SCF) is a company operating in the manufacturing industry and is headed by its managing director, Shin Chan. The company experienced rapid growth in the previous year due to the following reasons:
1. Shin Chan has falsified the company's sales records by creating several fictitious sales agents responsible for generating 30% of the company's revenue.
2. Twenty-five percent of the cost of sales is capitalized by falsifying purchase invoices in collaboration with the supplier company.
3. Company directors are given attractive rewards and bonuses associated with reported profits. Therefore, the directors did not question the abnormally rapid growth of the company and were unaware of the frauds Shin Chan had committed over the years.
Shin Chan had spent large sums of money to bribe his colleagues to hide their fraud from the auditor. SCF has reappointed the auditor for more than ten years. Shin Chan convinced his colleagues that the auditor should sign 'confidentiality' agreements that effectively prevent the auditor from verifying sales with independent third parties and prevent the auditor from reviewing company directors' service contracts. The agreement will prevent the auditor from discussing company affairs with sales agents.
The fraud was later discovered after a disgruntled director wrote a flying (unnamed) letter to the stock exchange about the reasons for SCF's growth. The auditor was subsequently indicted by Suka Dia bank, which had given a loan to SCF based on an interim account. The auditor has scrutinized the interim accounts and also issued a review report.
Required -
1. Discuss whether the auditor will be found guilty of negligence due to his failure to detect fraud committed by Shin Chan.
2. Explain TWO (2) defense approaches that the auditor can use to defend themselves from the prosecution.
3. What is meant by contributory negligence? Based on the above case, explain whether the auditor can use contributory negligence to defend himself from the bank's claim?
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