Nine Dragons Ltd is a company trading in China. The company has appointed ER Sun

Question

Nine Dragons Ltd is a company trading in China. The company has appointed ER Sun, an auditing firm, at its auditor. Nine Dragons Ltd wishes to borrow $1 million dollars from Quick-Finance Ltd, a company trading in Australia. Before lending the money, the directors of Quick-Finance Ltd viewed the auditor's report of Nine Dragons Ltd posted at their web-site and which was prepared by ER Sun. Based on the positive financial information contained in that auditor's report, the directors of Quick-Finance Ltd were happy to lend the money to Nine Dragons Ltd. Six months after the loan was advanced. Nine Dragons Ltd experience financial difficulties and the company collapsed. The directors of Quick-Finance Ltd are shocked by these sudden events and are furious at the financial loss they are facing. They wish to sue ER Sun, the auditing firm, to recover their financial loss. Advise the directors of Quick-Finance Ltd of their chances of success in successfully suing ER Sun to recover the $1 million dollars loaned to Nine Dragons Ltd on the basis of the contents of the auditor's report which they viewed on the world wide web.

Explanation / Answer

The directors of Quick finance cannot recover their loss from ER Sun. The auditor's are not responsible for the default of loan repayment by Nine Dragons ltd. The Audit report is not a certificate of future financial performance of the company. It only certify the true and fair view of financial statement. It looks in to the accounts already closed. Auditor's report never ensure that the company will have same performance or growth in future years.

Audit firm is also not responsible for the Audit report published in world wide web. The website is the private property of the company. Auditor's is no obliged to check whether the company is published the actual report issued by the auditor or made any altration on the same. It is the duty of the Lender to ensure the correctness of reprt published in website. It can also demsnd an interim financial statement before granting loan to ensure that this year also company is performing well. It can adopt n number of parameters to ensure the financial soundness of company rather than just going through last year Auditor's report.

Th Going concern assumption used in financial statement belives that company will operate for forseable future. The auditor also certify the same since he is not giving any adverse or qualified opinin on going concern assumption. It is not a 100 % guarantee that company will not face a financial difficulty in future, It is based on evidence availbale uyp to the date of Audit report. There may be incidents that took place after the issue of Audit report that will affect the going concern of the company.

So the legal proceeding against Auditors will not sustain

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.