There were errors in the changeover of the computer system

Assignment Help Accounting Basics
Reference no: EM13834536

Jimmy Farnham is the external auditor for Aussie Outback Tours Ltd, a company which promotes tours to the Australian outback and owns a chain of souvenir shops. Jimmy has been auditing the company since it was listed on the Australian Securities Exchange 7 years ago. Although the financial statements of the company have never received a qualified audit report, Jimmy is aware that the company has been making losses for the past 2 years as a result of short-term cash flow difficulties influenced by the global financial crisis. The company has no long-term loans and the bank overdraft is near its limit at the end of the current financial year.

During the current financial year, the company upgraded its accounting system to a computer database. An IT consultant was contracted to assist in the correct changeover of files for this system. At year-end, this new system had been in place for 6 months, and the directors have advised Jimmy they are happy with the way it is operating. Jimmy does not have the expertise to review and evaluate the database management system, so he asks an independent expert to undertake this role. This person concludes that the system appears reliable and that the changeover was correctly carried out. Jimmy has never before audited this type of system, so he attends some courses to familiarise himself with its features. His accounting firm has a standard work program that he uses to test the internal controls operating within the new system.

In Jimmy's review of the minutes of the board of directors' meetings, he becomes aware that the company's major shareholder (which currently owns 35 per cent of the shares of the company) is considering making an offer to purchase the remaining shares. This is because the company's share price is trading well below its net asset backing.

After the company's audited financial statements for the current year are published, the takeover offer from the company's major shareholder proceeds on the basis of an offer price equivalent to the net asset backing of $2.20 per share (as determined from the financial statements). The takeover offer results in acceptances from 94 per cent of the company's other shareholders and compulsory acquisition proceedings have been instituted for the other 6 per cent.

While these compulsory acquisition proceedings are being instituted, it is discovered that there were errors in the changeover of the computer system, which resulted in the year-end inventory at the souvenir stores being materially overstated. After the subsequent write-down of inventory, the correct net asset backing of $1.40 per share is calculated. The major shareholder commences legal action against Jimmy for alleged negligence for its loss of $0.80 per share.

Required:

Explain whether you believe the major shareholder would be successful in the legal action for negligence against Jimmy Farnham. In doing so, you should discuss and apply each of the four criteria/tests listed on p. 209 of the Leung et al textbook, as well as potential defences that could be used by Jimmy including contributory negligence.

Reference no: EM13834536

Questions Cloud

A champion archer hits a bullseye in a target mounted : A champion archer hits a bullseye in a target mounted on a wall a distance L away and situated at a height h above his bow.  Deduce the equation between the speed (at which the arrow left his bow), the arrow's initial angle θ with the horizontal, the..
Develop a report in which you present your assessment : Review and assess the interview questions used by the Southwood School District. Develop a report in which you present your assessment
At what amount will the note be reported : (a) Prepare the journal entry at December 31 (Harper's year-end) for 2011, 2012, and 2013 to record the fair value option for these notes. (b) At what amount will the note be reported on Harper's 2012 balance sheet? (c) What is the effect of recordin..
Directions to the buried treasure : The treasure map in the figure gives the following directions to the buried treasure: "Start at the old oak tree, walk due north for 540 paces, then due east for 140 paces. Dig." But when you arrive, you find an angry dragon just north of the tree. T..
There were errors in the changeover of the computer system : Explain whether you believe the major shareholder would be successful in the legal action for negligence against Jimmy Farnham. In doing so, you should discuss and apply each of the four criteria/tests listed on p. 209 of the Leung et al textbook, as..
Analyze the actual and budgeted results of operations : The president of Coopie Awards was analyzing the actual and budgeted results of operations for the current year. She noticed several favorable variances and, in a meeting gave accolades to the production manager.
Two service providers operating in the same space : Consider a scenario in which two service providers operating in the same space have the following operational characteristics:
Canadian motorcycle company : The Canadian Motorcycle Company (CMC) has determined that its customers are very price-sensitive, with the number of motorcycles purchased heavily dependent upon the prices set. The company makes two different styles of bike: the high-end Jet and the..
Calculate the annual growth in operating and total revenue : Calculate the annual growth in Revenue (Operating Revenue and Total Revenue) and the EBITDA margin for DMP for each year between 2010 and 2014.

Reviews

Write a Review

Accounting Basics Questions & Answers

  How much control does fed have over this longer real rate

Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate?

  Coures:- fundamental accounting principles

Coures:- Fundamental Accounting Principles: - Explain the goals and uses of special journals.

  Accounting problems

Accounting problems,  Draw a detailed timeline incorporating the dividends, calculate    the exact Payback Period  b)   the discounted Payback Period. the IRR,  the NPV, the Profitability Index.

  Write a report on internal controls

Write a report on Internal Controls

  Prepare the bank reconciliation for company

Prepare the bank reconciliation for company.

  Cost-benefit analysis

Create a cost-benefit analysis to evaluate the project

  Theory of interest

Theory of Interest: NPV, IRR, Nominal and Real, Amortization, Sinking Fund, TWRR, DWRR

  Liquidity and profitability

Distinguish between liquidity and profitability.

  What is the expected risk premium on the portfolio

Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of which require semiannual interest payments.

  Simple interest and compound interest

Simple Interest, Compound interest, discount rate, force of interest, AV, PV

  Capm and venture capital

CAPM and Venture Capital

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd