Risk and Materiality Notes

Topics: Audit, Financial audit, Auditing Pages: 4 (1632 words) Published: September 26, 2014
Take Home Exercise 1

1. Kenny recently joined the public accounting firm of Hamid, Krishnan & Co. as an audit assistant after obtaining an accounting degree. He quickly established a reputation for thoroughness and a steadfast dedication to following prescribed auditing procedures to the letter. On his third audit for the firm, Kenny examined the supporting documentation for 200 disbursements as a test of acquisitions, receiving, vouchers payable and cash disbursement procedures. In the process he found twelve disbursements for the acquisition of materials with no receiving reports in the documentation. He noted the exceptions in his working papers and brought them to the attention of the senior-in-charge. Relying on prior experience with the client, the senior-in-charge disregarded Kenny’s comments and nothing further was done about the exceptions. Subsequently, it was learned that one of the client’s purchasing agents and an accounting clerk were engaged in a fraudulent scheme whereby they diverted the receipt of materials to a public warehouse while sending the invoices to the client. When the client discovered the fraud, the conspirators had obtained approximately RM200,000; RM150,000 of which was recovered after the completion of the audit.

Discuss the legal implications and liabilities to Hamid, Krishnan & Co. as a result of the facts just described.

The accounting firm, Hamid, Kishan & Co. is potentially liable to its client because of the possible negligence of it agent. The audit senior-in-charge apparently has failed in carrying out his duties within the scope of his employment. To be successful in a legal action for negligence, there must be proven the following elements: Duty of care.

Breach of the duty of care.
Financial loss.
The exceptions in the purchase and disbursements transactions have been brought to his attention, but he did not investigate further. The senior-in-charge is governed by the usual...
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