Reference no: EM132707714

Question - You are the auditor of Jehello Incorporated, a public company with a December year end. Your firm has audited Jehello for the past three years. Jehello manufactures and develops electronic media and sells its products to retailers and wholesalers. The following issues were documented in the working paper files for the prior year audit:

The company had incurred expenditures of $400,000 related to the development of a new music format for electronic media. The large majority of the costs were related to development of software, hardware, and presentation of the results to customers who participated in research studies. Management had been optimistic that the new sound system would work well, even though research study results indicated poor consumer acceptance. These research and development costs had been fully capitalized.

About 40% of the company's revenues were from one customer. That contract had been due for renewal on May 15, ten days after the audit report had been issued. Documents provided to the auditor indicated that Jehello's customer seemed likely to renew the contract, although quality control disputes were escalating. On May 14, Jehello was informed that the contract would not be renewed.

Jehello has defaulted on its bank loans and the bank is suing you (the auditor), saying that the financial statements presented last year were false and misleading due to inadequate disclosure, and that the auditor was negligent regarding the audit of research and development costs.

Required -

1. Describe with Eight (8) specific defense points that the auditor would use to defend their position in the court of Law.

2. How likely is the auditor going to succeed against the lawsuit?