Part B (10 marks) Jacobs Jack, the owner of a small company, asked Janet Jones,
ID: 2470099 • Letter: P
Question
Part B (10 marks) Jacobs Jack, the owner of a small company, asked Janet Jones, a public accountant, to conduct an audit of the company's records. Jack told Jones that an audit was to be completed in time to submit an audited financial report to a bank as part of a loan application. Jones immediately accepted the engagement and agreed to provide an auditor's report within 3 weeks. Jack agreed to pay Jones a fixed fee plus a bonus if the loan was granted. Jones hired 2 accounting students to conduct the audit and spent several hours telling them exactly what to do. Jones told the students not to spent time reviewing the controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that supported Jack's financial report. The students followed Jones instructions and after 2 weeks gave Jones the financial report, which did not include footnotes. Jones reviewed the financial report and prepared an unqualified auditor's report. The working papers, however, did not refer to the use of acceptable accounting policies or compliance with relevant regulations and statutory requirements. Jack received the loan from the bank. Unfortunately, 6 months later Jack was forced into liquidation due to financial difficulties. As a result, the bank was unable to recover the amount of the loan. The bank is now attempting to recover its money from Jones on the grounds that Jone's audit was report was negligently prepared. Required: (Provide specific case references to support your answer) a) Do you believe Jones has used reasonable skill and care in conducting the audit? (5 marks) b) Do you believe Jones owes the bank a duty of care? (5 marks)
Explanation / Answer
a) Do you believe Jones has used reasonable skill and care in conducting the audit?
No, Jones didn't used reasonable skill and care in conducting the audit due to following reasons:-
1) Jones accepted the engagement without considering the availability of competent staff and he didn't supersive the assistants.
2) He did not study internal control, nor did the assistants.The work performed was more an accounting service than it was an auditing service.
3) His improper examination would not enable her to determine whether accounting principles have been consistently applied.
b) Jones owes the bank a duty of care because he did not conduct a proper examination would not enable her to determine whether accounting principles have been consistently applied or not.