Essay 2: Summary of the case

Essay 2: Summary of the case

This a case where there auditor of financial statements of Fred, storm company; the auditor touché, Niven & co. Public Accountants. The users of the financial statements rely on this reports to make a decision such as giving out loans and also giving goods on credit.

Fred, Storm Company

The storm was trading in rubber and raw materials, which needed much working capital. The stern company sought a loan from Trams Company of $100,000.In response, trams requested for an audited financial statement which they gave out as audited by touché, Niven and company. Convinced by an unqualified report by an independent auditor, they gave the loan and even after some time gave the other loan of $65,00.

Fred stern also got other two loans amounting $300,000 from a bank using the same audited financial statements as at 31st December 1923.However, in 1925, the Fred stern was declared bankrupt.

In response, the ultra-mesh sued the audited for being fraudulent and negligence. In the case of ultramarines corporation vs. touché. Ultram’s alleged that the Auditor would be keen enough to notice over estimation of accounts receivables by $700,000.

Ultimate’s civil suit which was against Touché was before a jury this was in New York. The plaintiff complained that the auditor should have discovered the overstated account receivables.

In February 1924, series which was doing most of his field work went to Sterns office to do his Audit. He saw that Stern’s general ledger had been not posted since April 1923.Befor he prepared trial balance, Romberg who was Sterns accountant made some entries in general ledger but this lack support document in the court even for the sites

The courts acknowledged that sampling was necessary for the touché auditor.  However, the sales for December were suspicious. It emerged in the court that trams noted that touché had more reasons concerning net worth of storm, which some assets had been used as collateral security for securing some loans for the stern company. The court then ruled that the touché Failed to be skeptical enough. The case of fraud got dismissed.

However, the court was able to state that the auditor committed negligence and trams were awarded $186,000 as damages.

At the high court, Touché attorneys appealed to the court of recourse. The chief justice who as scholar and whose opinion were highly respected gave his ruling. He supported the negligence decision for usernames case hence maintaining that touché where responsible and had a duty of care to trams. He said that Touché where not solely accountable to unforeseen beneficiary

Answers to the question

Item 1.

The court should socialize this loses to the primary. This would have the following benefits.

The accounting firm should know that they owe a duty of care to the users of financial statements. This means the accounting firm will be more skeptical when performing their work. As a result, the business would be reliable, and any user would use them without fear.

On the third part, they will be able to make a sound opinion based on audited financial statements and can always sue for damages if there is a violation of duty of care, they incur damages and losses while making a decision based on the audited statements.

On the other hand, the audit clients will benefit from this because their financial statements will be trusted by the potential investor, creditors in advancing loans like for the case frames vs. Touché Company. The company will use these comments any time they want to get an external source of capital.

However, there will be cost of such if such socializing takes place. For example, if any company suffers losses on relying on the audited statements, then sued the accounting firm as it confirmed they didn’t excise the duty of care, they will pay for such damages hence this exposing accounting firm to more risk.

In my opinion, the court should be responsible

 Question 2.

The audit of legal responsibility for the security exchange differs. This is because initially, each company could choose its policies when preparing their financial statements. The auditor should report to the company board and also security Exchange Company.

Question 3.

The current reporting standards differ from the once which was there before the 1920s, in the following ways

There is now board control. This was not there and has helped in independence of auditors who report directly to the board

The size of the company has a made changes because initially, company would only disclose the balance sheet, but now they have to disclose cash flows, statement of compressive income

Need for dividend has also made it necessary for more disclosures since dividend cannot be declared from balance sheet but statement of compressive income

Question 4.

Companies initially issued audited balance sheet before the 1920s, but with changes in with more disclosures the company discloses other relevant statements such income statement, statement of changes in equity and cash flows. The need for dividend has made it a mandatory to disclose income statement

Question 5.

In the letter of engagement between auditor and client, the client should not disclose the users of the financial statement. This is because auditors are guided by the principle of the audit, and hence the have duty of care to all users of audited financial statements. This may at one point eliminate their responsibility to the privates parties, but with guidance of standards, they owe they due care

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