Musical Productions Limited has had declining sales as more and more media are being presented online rather than on CD or DVD. It diversified its business by moving into backup systems, but is still having trouble boosting income.
The audit team was led by Theresa Sanford, who obtained her CPA last year. Theresa had two assistants, Marv and Uhta, who did the work in the accounts receivable and inventory areas. Theresa felt that they did not require supervision, as they had been with the firm for two years and were expected to do well on their professional exams this year. Marv found that the accounts receivable had many old accounts and customers were tough to get hold of. Accordingly, he decided to accept management's representations with respect to the balances. Similarly, Uhta noted that there were still many CDs in inventory that had been there for over three years. Management insisted on recording these at cost. Uhta accepted managements' valuation.
Two months after the audit report was issued, Musical Productions Limited went bankrupt. It was found that many accounts receivable were for fictitious customers and the receiver was only able to obtain five cents on the dollar for the inventory, which was sold as scrap.
The bank is suing the auditors to recover its bank loan, which had been renegotiated based upon the results of the financial statements.
Required:
Will the bank be successful in its suit? Why or why not?

Question

Quizplus · Accepted Answer

The Answer of Musical Productions Limited has had declining sales as more and more media are being presented online rather than on CD or DVD. It diversified its business by moving into backup systems, but is still having trouble boosting income.
The audit team was led by Theresa Sanford, who obtained her CPA last year. Theresa had two assistants, Marv and Uhta, who did the work in the accounts receivable and inventory areas. Theresa felt that they did not require supervision, as they had been with the firm for two years and were expected to do well on their professional exams this year. Marv found that the accounts receivable had many old accounts and customers were tough to get hold of. Accordingly, he decided to accept management's representations with respect to the balances. Similarly, Uhta noted that there were still many CDs in inventory that had been there for over three years. Management insisted on recording these at cost. Uhta accepted managements' valuation.
Two months after the audit report was issued, Musical Productions Limited went bankrupt. It was found that many accounts receivable were for fictitious customers and the receiver was only able to obtain five cents on the dollar for the inventory, which was sold as scrap.
The bank is suing the auditors to recover its bank loan, which had been renegotiated based upon the results of the financial statements.
Required:
Will the bank be successful in its suit? Why or why not?

Musical Productions Limited Has Had Declining Sales as More and More