Principles of Lender Liability Management

Question: Discuss about the Principles of Lender Liability Management. Answer: Introduction: Auditing is a process that involves the examination of various accounts of an organization. There are different kinds of accounts in an organization. It is very natural that there can be mistakes in some of toes accounts that can be occurred at the time of formulating those accounts (Louwers et al. 2013). It is the responsibility of the auditors to detect the material misstatements in the accounts of the company so that the annual report of the organization is true and fair. The given case study states that Impulse Private Limited, widely known as Impulse, is an entertainment system manufacturer that was established in the year of 2005. From the very first day of the company, King and Queen have been performing the audit operations of the company. It can be said that there is a good relation between Impulse and King and Queen. As per the given case study, King and Queen have examined the business accounts of Impulse and they have given the unqualified audit report to the company. The auditors issue the unqualified audit report when they find that there is not any kind of material misstatement in the financial accounts of the organization; and the company has been formulated by complying all the rules and regulations of Generally Accepted Accounting Principles (GAAP) (Czerney, Schmidt and Thompson 2014). On the contrary, the qualified audit report of the auditors states that there the accounts of a business organization are nor free from material misstatement and there is a presence of fraud or manipulation in those accounts (Ittonen 2012). However, it is mentioned in the case study that Impulse was not in a good condition at that time as the company was facing massive liquidity problems. Impulse was facing massive debtors and inventory related issues at that period. After that, the company took a massive loan from Easy Finance Limited (EFL) to revive the liquidity position of the company. Later, the financial position of the company deteriorated and the company was liquidated in the month of December 2012. This liquidation resulted in the loss of the loan money that was given by EFL; and for this reason, EFL is taking legal actions against King and Queen. As per EFL, the unqualified report of the auditor did not reflect the liquidity problem of the company and this reason contributed to the loss of money to EFL. The main argument of the topic is that whether King and Queen are liable to EFL or not. In this regard, it is necessary to shed light on the responsibility of the auditors. The main responsibility of auditors is to plan and perform the whole audit operation of an organization so that it can be verified that the different financial accounts of the organization is free from material misstatement and all kinds of frauds (Asare and Wright 2012). On the other hand, it is the responsibility of the auditors to take care that the company is following the rules and regulations of Generally Accepted Accounting Principles (GAAP) (Schroeder 2013). These are the two major responsibilities of the auditors. It is the responsibility of the management to interpret the audit report of the organization. Releasing details about the liquidity position of the company is the responsibility of the management. The auditors have nothing to do with the liquidity position of the company. The purpose of the audi t report was unknown to King and queen. As per the rules and regulations of audit, the auditors are not liable to any third party if they do not know the purpose of their audit report. In this case, King and Queen were not informed the purpose of the audit report. Thus, King and Queen have no liability towards EFL. Some examples of popular cases are presented below to support the answer. The first case is Marcus Bros. Textile vs. Price Waterhouse (1999). There are three parties in the case. In this case, Price Warehouse was the audit partner of Piece Goods Shops Company (Piece Goods). As per the audit report of Price Warehouse, the accounts of Piece Goods were fairly presented and they were free from all kinds of material misstatement. Based on the audit report of Price Warehouse, Marcus Bro. made an extension in the credits to Piece Goods. However, in the year of 1993, Piece Goods became bankrupt and Marcus Bros. could not recover the money invested in Piece limited. Marcus Bros. files case against Price Warehouse by stating that the audit report of Price Warehouse did not reflect the financial condition of the company. However, the judgment of the court was in the favor of Price Warehouse as any auditor is not liable to any third party without knowing the purpose of the audit program (Hood 2012). Landell vs. Lybrand is the example of second case. As per this case, CPA was the auditor of Lybrand Ross Bros. Montgomery. Landell purchased eleven shares of the company Lybrand Ross Bros. after considering the report of CPA. However, the Plaintiff Landell had to face loss as the financial position of the company deteriorated and the share prices decreased massively. Plaintiff Landell filed a case against CPA; but the court made the judgment in the favor of CPA as the auditors are not liable to any third parties (Koppelman 2014). Based on the above discussion and the examples, it can be said that the King and Queen is not liable to EFL as the auditors have no responsibility to any third party. Confidentiality is one of the most important aspects of auditing. It is the responsibility of the auditors to maintain confidentiality regarding the important data and information of the audit client. The auditors do not have any right to disclose any kinds of information about the audit client to any third party. They cannot even disclose the important data to the other employees of the client firm (Mironeasa and Codin? 2013). There are two dimension of the case. At the presence of the consent of Impulse, King and Queen would have liability towards EFL. At the presence of consent from Impulse, King and Queen needed to disclose the liquidity position to any third party. At that point, King and Queen had to make further valuation of the liquidity position of the company as they were directed to disclose the liquidity position of the company. Hence, King and Queen would be liable to EFL. Another dimension of the case could be the absence of the consent of Impulse to King and Queen to d isclose any kind of financial position of the company. In this point, it is the utmost responsibility of King and Queen not to disclose any kinds of information of the financial position of the company. As per the rules and regulations auditing, King and Queen would make a serious offense if they disclose the liquidity situation of Impulse to EFL for the ease of their decision making process. In this case, King and Queen have no responsibility towards ELF as EFL is a third party to King and Queen. Thus, King and Queen would not be liable to EFL in this purpose. It is desired that the auditors do not have any kinds of financial interest in any of the properties of the audit client. This is called the independence of the auditors (Hoos, d'Arcy, and Messier 2012). As per the principles of Generally Accepted Accounting Principles (GAAP), there are two kinds of auditors independence. One is Actual Independence and another is Perceived Independence. Both of them are discussed below: Actual Independence: There are two other name of actual independence. They are real Independence and Independence in fact. Actual independence refers to the state of mind of the auditors. It is desired that the auditors must have special state of mind at the time of the audit process. This specific state of mind is called the Actual Independence of the auditors. The presence of actual independence helps the auditors to take critical as well as crucial decisions in the tricky situations. Often it happens that the management of that organization puts the auditors in difficult situation; actual independence assists the auditors to take perfect decisions in this type of situations (Dogui, Boiral and Heras?Saizarbitoria 2014). Perceived independence: The other name of perceived independence is the independence in appearance. Perceived independence evaluates the viewpoints of the auditors. An auditor who has perceived independence can analyze any critical situation better than any other can and they can judge the situation in different ways. Perceived independence assists the auditors in deriving different solution of a same problem so that the best one can be selected among them. It is the perception of the auditors to see different kinds of auditing problems. One of the major features of perceived independence is that it cannot be measured. Different auditor has different kinds of perceived independence. An auditor having actual and perceived independence can perform the audit operations more perfectly (Schmidt 2012). The provided situation says that Bob is continuing his higher study and the audit profession in Club Casino at the same time. It has been mentioned that Bob has copied some of the financial information of the company for his own purpose without the consent of the company. The confidentiality principles of auditors say that the auditors of an organization cannot disclose or copy the data and information of that organization to anyone. This principle indicates that the act done by Bob is a serious offence as it is against the principles of auditing. The companies should implement more effective safety measures so that the important data and information is kept in safe places. On the other hand, the passwords or ant details of important information cannot be disclosed to anyone (Shaub and Braun 2014). As per the situation provided, Wendy is performing the audit operation in Ace Limited. After the retirement of the company secretary of Ace Limited, the position was vacant for six months. Wendy was the temporary company secretary of Ace Limited at that period. As per the auditing principles, this act of Wendy is against regulations of auditing. It has been mentioned in the audit principles that an auditor cannot play any role of senior management in the same organization. This act of Wendy contributes in the breaching of auditing principles. There is a safeguard available for this act. The company secretary position needs to be replaced. On the other hand, the company can terminate Wendy as audit assistance as per the rules and regulations of audit authority (Weirich and Reinstein 2014). This case states that one of a factory supervisor of Precision Machinery Limited is the father of Leo. As per the case study, Leo was appointed as the internal audit partner of Precision machinery Limited who has the responsibility to control the cash payment system. This act of Leo is against the rules of auditing. This rule says that any relative, son, daughter, or close friends of any member of the organization cannot be the auditors of the same company. Thus, the act of Leo has breached the rules of auditing. Leo should be replaced from the internal auditor position of Precision machinery Limited as a corrective measure (Stuart 2012). The auditing rules and regulations say that the auditors cannot take any kind of gifts from the audit client as it can influence the decision of the auditors (Arruada 2013). As per the given scenario, Chan and Associates is the audit partner of Reproduction Private limited. Chan and Associates has taken furniture and shares from Reproduction Private Limited as their outstanding fees for three years. Moreover, the value of the furniture was not worth the full fees of Chan and Associates. This is a serious offence as it is against the rule of auditing. It is against the integrity of the audit process. Chan and Associates should immediate return all the furniture and shares as a corrective measure (MaAyan and Carmeli 2015). References Arruada, B., 2013.The economics of audit quality: Private incentives and the regulation of audit and non-audit services. Springer Science Business Media. Asare, S.K. and Wright, A.M., 2012. Investors', auditors', and lenders' understanding of the message conveyed by the standard audit report on the financial statements.Accounting Horizons,26(2), pp.193-217. Czerney, K., Schmidt, J.J. and Thompson, A.M., 2014. Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?.The Accounting Review,89(6), pp.2115-2149. Dogui, K., Boiral, O. and Heras?Saizarbitoria, I., 2014. 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