Adelaide Institute of TAFE

Assignment: Quickfix Importers Pty Ltd

External Audit Report

Advance Diploma of Accounting

By Linh Tieu

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 CONTENTS
Page Number

1. Abstract………………………………………………………………………Page 3

2. Qualifications………………………………………………..……………….Page 4

3. Contractual Obligations…………………………………………...……...…Page 5

4. Duties, rights & legal liability.........................................................................Page 6

4.1 Duties………………………………………………………….…….Page 6
4.2 Rights………………………………………………………………..Page 7
4.3 Responsibility for detect fraud…………………...………………..Page 7
4.4 Liability to Shareholders………………………………..………….Page 8
4.5 Liability to Third Parties…………………………………………..Page 8
4.6 Liability to Clients…………………………………………...……..Page 9
4.7 Managing legal liability……………………………...……………..Page 9

5. Conclusion…………………………………………………….…………….Page 10

6. Reference List………………………………………………………………Page 11

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1. Abstract

In this report, the topics that are covered will include the qualifications of an external
auditor of a company, contractual obligations of an external auditor and how they are
entered into, the duties, rights & legal liability of the external auditor to Quickfix
Importers Pty Ltd.

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2. Qualifications

An external auditor is an auditor who performs an audit on all of the financial

statements of a company or other institution. It does not belong to the organisation
but is an independent entity.

To become an external auditor, qualifications must be met. This includes the external
auditor obtaining a four-year college degree in accounting, audit or tax. Having
obtained the four-part certified public accounting (CPA) exam where it tests an
external auditor’s knowledge of business processes, audit, accounting and tax. Also
an external auditor to be qualified must have worked for three years under the
direction of a CPA (Codja 2010).

CPA exam consists of four topics including Auditing and Attestation, Business
Environments and Concepts, Financial Accounting and Reporting and Regulations.
Auditing and Attestation tests the knowledge of accounting standards and audit
technology tools. Where as Business Environments and Concepts ensure
understanding of general business topics such as economics, financial management,
corporate strategy and market competition. Financial Accounting and Reporting
covers accounting principles and how they apply to a entity’s financial statements.
Finally ‘Regulation’ tests the knowledge of federal, state rules as well as business
laws such as contracts and legal standards for accountants (Codja 2010).

Also an external auditor must always hold ethical values when conducting an audit or
a review of corporation. Ethical values require external auditor’s to reveal conflicts of
interest as well as illegal or fraudulent activities to clients or regulators (Codjia 2010).

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3. Contractual Obligations

The initial appointment of an auditor of a company has to be appointed through the

Quickfix Importers Pty Ltd AGM, Annual General Meeting, by either the directors of
the company or the company in general meeting (Australian Government The
Treasury 2011) as per section 327A.

The Board will assess the External Auditors on a number of criteria’s including
- The auditor being registered as an auditor under the Corporations Act
- The independence of the External Audit firm and ability to maintain
independence throughout the engagement
- No conflict of interest that could affect the independence
- Arrangements that are proposed to enable partner rotation
- Professional competency, experience and integrity
- Cost effectiveness (Australian Governance Masters 2010)

In the event, the Board will interview the external auditor to evaluate their suitability.
Subsequently meet to determine the preferred external auditor and approve the
auditor’s engagement letter and fees. Then the Company Secretary will have to
arrange the necessary notices, meetings and resolutions for the resignation or removal
of the existing auditor and the appointment of the new auditor (Australian Governance
Masters 2010).

The external auditor needs to rotate the senior audit partner and the audit review
partner every 3 years to ensure consistency and independence. However, the
company may also require the auditor to rotate other key senior audit personnel
engaged in providing audit services to the Company (Australian Governance Masters
2010).

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4. Duties, rights and legal liability

4.1 Duties
An external auditor must have independence when reviewing a company’s financial
statements and cannot have any relationship with the company (Rolfe 2007). This
includes no stocks, close relative with stocks, management positions and so on. The
external auditor has the statutory duty to report on the truth and fairness of the
financial statements (Arens 2009). The auditor has a duty to form a qualified,
unqualified, adverse opinion or any other disclaimer (Rolfe 2007).

However, the auditor must consider the followings:

- The entity has kept proper accounting records
- The entity’s balance sheet and income statement agree
- All the information and explanations that are considered necessary for the
purpose of an audit have been obtained
- The entity has complied with the relevant legislations requirements in respect
of the necessary disclosures (Rolfe 2007)

The auditor has limited duty to review other information than the financial statements.
The auditor must consider whether the information in any reports that will be
published with the financial statements is consistent with the information related to
the income statement and balance sheet (Rolfe 2007). If the auditor happens to find
any inconsistency, it would be disclosed in the audit report (Rolfe 2007).

Auditors must mandatory comply ASA 200 Objective and General Principles
Governing an Audit of a Financial Report. This is a reasonable assurance as to
whether the financial report, taken as a whole, is free from material misstatement.
This is a prerequisite to achieving the mandatory objective of the report, expressing an
opinion to whether the financial report is prepared in all materials (Arens 2009).

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4.2 Rights
Auditors have the rights to give constructive comments on the weaknesses in the
accounting records and systems that they review in the audit. Effectively, they can
provide statistical analysis of the accounting policies put in place by the company and
help management become aware of evidence that may affect future audits (Arens
2009). Giving advice management through recommendations in their audit notes or
discussions can improve the procedures for documentation more efficient, ethical and
fairly presentable (Arens 2009).

It is a requirement the auditor applies ‘reasonable skill and care’ when conducting the
audit. The auditor relies on control systems within the company to ensure there has
not been any distortion by any irregularity of fraud in the statements. However,
conducting an audit alongside accounting standards does not guarantee the detection
of material misstatement (Arens 2009).

4.3 Responsibility for detecting fraud

If there are indiscretions, auditors must report it to the level of management as well as
it being investigated. However if the auditors are suspicious the management may be
involved in fraud the auditor would report it to the board of directors (Arens 2009).
Thus it will impose legal requirements on additional duties.

There are matters to consider if there are material irregularities that have been
confirmed with the auditor, this includes:
- Effect on the financial reports or audit report
- Evaluation of the internal controls and need for further testing
- Managements proposed action to prevent the reoccurrence
- Public interest implications of the irregularities (Arens 2009)

Thus, suspect of fraudulent activities that may have occurred should be reported to
ASIC as a serious matter (Arens 2009) where the fraud is major that will harmfully
effect the financial position of the entity or the fraud is minor but the matter has not
been dealt with by the directors and not disclosed in the audit report (Arens 2009).

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Under the Corporations Law, the auditors must provide an auditor’s report to the
members of the company before the annual general meeting will be held. The
auditor’s report must state in their opinion:
- The financial statement is a true and fair view of the entity’s financial position.
- The financial statements are in accordance with the Corporations Act and
relative accounting standards.
- Whether auditors have obtained all necessary information
- Whether documents and records have been maintained (Arens 2009)

4.4 Liability to Shareholders

The audit is conducted in accordance with the Corporations Act. This means the
auditor is liable under common law to the shareholders for any negligence action of
statutory duties (Arens 2009).

Thus, the auditor is legally responsible to compensate a plaintiff if:

- A duty of care is owed
- Audit is negligently performed or careless opinion has been given
- Plaintiff resulted in a loss of the auditor’s negligence
- The loss is quantifiable (Arens 2009)

4.5 Liability to Third Parties

Third parties may be brought up under tort against auditors such as Hedley Byrne &
Co. Ltd vs. Heller Partners Ltd [1946] AC 465. In this case, Hedley Byrne was
acquired to extend legal liability for the loss that has arisen from negligent
misstatements from contractual relationships (Arens 2009). As duty of care was
established, the relationship between parties has been existed. Hedley Byrne took care
to restrict its application where the parties providing advice are experts or persons of
special skill. Thus this made it foreseeable that the injured party relied on the
judgement of an expert (Arens 2009).

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4.6 Liability to Clients
Liability to clients means breach of contract. Hence if the auditor does something
wrong in the performance of the duty resulting in a financial loss to the company.
The case London and General Bank Ltd [1895] CH 673, the auditors were held liable
as the auditors failed to report that the Balance Sheet was not properly drawn. Large
sums were advanced to the customers and interest was accrued however neither
advance nor accrued interest was receivable. No provision for bad debts was made
and the company paid dividend. Under section 260, the auditors failed to report to
members material misstatement, thus auditors were punished with a fine (Arens
2009).

4.7 Managing legal liability

Auditors can acquire specific action to minimise their legal liability and this includes:
- Deal only with clients possessing integrity
- Hire qualified personnel, and supervise them properly
- Follow auditing standards, rules of conduct and other professional guidelines
- Maintain independence
- Understand client’s business
- Perform quality audits
- Document the work properly
- Obtain an engagement letter and a representation letter
- Carry adequate insurance
- Seek legal counsel (Arens 2009)

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5. Conclusion

In conclusion, external auditors must have independence and the ability to apply
accounting standards with the profession. Failure to comply with standards can cause
serious consequences and may result in legal liability.

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6. Reference List

Arens A, Best P & Shailer G 2009, Auditing, Assurance services and Ethics in
Australia, 8th end, Peasron Education Australia, Australia

Australian Government The Treasury 2011, Appointment and Independence of

Auditors, online accessed 4 March 2011
URL: http://www.treasury.gov.au/documents/294/PDF/chap07.pdf

Australian Governance Masters 2010, Summary of Procedures for the Selection and
Appointment of External Auditors & Rotation of External Audit Engagement
Partners, online accessed 4 March 2011
URL:http://www.governancemasters.com.au/aqf_testsite/downloads/ProceduresExter
nalAuditor.pdf

Codjia M 2010, External Auditor Certification, online accessed 26 February 2011

URL: http://www.ehow.com/about_6626642_external-auditor-
certification.html#ixzz1FCQbCf7d

Rolfe T 2007, Financial Accounting and Tax Principles, 1st edn, CIMA Publishing,
United Kingdom

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