Reference no: EM133185335

Question - Hippo is the legal counsel of Diligent Audit, a firm of CPAs. During the year, the review partner Cat refers to him several cases for advice on the likely professional liability of the partners involved in the audit. Below are three of them.

Case 1 - Anthony is the auditor of client A. During the year, A replaces several machine parts of ten machines. The cost of replacement is capitalized as an asset on the statement of financial position because A claims that the upgraded machines could produce goods of better quality. Anthony accepts the explanation without further enquiry. However, it happens that the parts represent normal repair.

Case 2 - Client B is a large retailer in the region. It normally holds cash in the safe in the retail outlets after business hours. Barry, the auditor of B, counts the cash on hand at the year end at several large outlets and reconcile the cash balance held by other outlets with the bank statements. It turns out that a branch manager of B has diverted the money for personal use during the year and repaid it a few days later. Barry's audit tests do not discover this.

Case 3 - Client C is a property investment company. In the past, it adopted the cost model for investment properties under the accounting standard number 40 Investment Property. This year, it changes to the fair value model. Cathy, the auditor, agrees with such a change. However, because of fluctuation in market value, C records losses in valuation in the income statement. Some dissatisfied shareholders claim that the financial statements are misstated.

Required - For each of the cases, discuss whether the auditor is professionally liable in court, if a case is brought forward.