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I have attempted the part (a) of the question Groom Co (BPP Kit). The question relates to professional, ethical and quality issues. I checked the solution which states that the Spaniel Co (the client can sue the auditor). How is this possible ?
Firstly, the auditors are reportable to the shareholders and owe a duty of care to them and not to the management. Secondly, the auditors provide only reasonable assurance. What is the guarantee that the fraud would have been detected had the procedures been performed over payroll cycle?
I might not be looking at exactly the same version because I don’t have a BPP kit – but in the version I am looking at, the fraud is material (>5% of total assets).
The unmodified audit opinion gives reasonable assurance that the financial statements are free from material misstatement (page 55 of the notes). But Groom & Co has failed in its responsibilities as stated in the auditor’s report (see top of page 113) because “neither tests of controls nor substantive audit procedures were conducted on payroll”. The auditor MUST perform some substantive procedures on all material classes of transactions, account balances and disclosures (irrespective of whether it performs tests of controls).
The company has suffered a loss and can absolutely sue the auditor – the company represents the shareholders “as a class”. An individual shareholder could not.
That procedures, had they been performed, might not have detected the fraud would be no defence – the auditor has not complied with ISAs(!)
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