Winston Chang,a PA,conducted the audit of Manra Manufacturing Ltd. ,a small company that produces a variety of machined parts for the automotive and computer industries.The audit showed that the company produced a small profit after paying the owners of the company a high salary.Manra was purchased by a competitor,Cheblay.Cheblay had hoped to produce efficiencies by combining the two companies but was unable to do so.Cheblay sued Chang because it relied upon the financial statements when purchasing the company's shares,claiming that the machines,which were about fifteen years old,had been overvalued.The machines were recorded at cost,which was below net realizable value.What is the auditor's best defence?

Question

Quizplus · Accepted Answer

The best defence for the auditor in this case would be the absence of negligence. The audit showed that the company produced a small profit after paying the owners of the company a high salary, which indicates that the auditor had performed their duties diligently. Additionally, recording the machines at cost, which was below net realizable value, is a generally accepted accounting principle and does not indicate negligence on the part of the auditor. The auditor had a duty of care to the company, but if they fulfilled that duty and performed their duties diligently, then they cannot be held liable for any losses incurred by the purchaser. Contributory negligence and absence of liability are not relevant defences in this case.

Winston Chang,a PA,conducted the Audit of Manra Manufacturing Ltd