Case:
Dan James obtained his CPA designation 3 months ago after articling with a local CPA firm, Jack Knows Best LLP. Due to his outstanding abilities, Mr. Wally Jack CPA, senior audit partner, assigned Dan James as the audit senior on the audit firm's new and first credit union account, Windsor Electrical Credit Union, for the year ended December 31, 2015. Windsor Electrical Credit Union was the largest credit union in the City of Jill, Ontario. Dan James' past audit experience was with a small automotive manufacturer for two years as the audit team's junior audit assistant. Windsor Electrical Credit Union had advised Mr. Jack that the Credit Union had changed computer systems in 2015. In early January 2016, as he was leaving for vacation for three weeks, Mr. Jack briefly met with Dan James and advised him to contact the former credit union auditors, review the previous auditor's file, to follow the same approach in the 2015 credit union audit, and to have the audit completed within three weeks when Mr. Jack returned. Upon his return, Mr. Jack, who was under a very tight reporting deadline from Windsor Electrical Credit Union, reviewed and approved the draft financial statements prepared by Dan James for delivery that afternoon. Although a number of incomplete audit procedures were noted in the audit file, including the bank reconciliation and quality assurance review, Mr. Jack asked Dan James to submit the file to the quality assurance control group who would take care of any audit concerns and outstanding issues that day. Mr. Jack took comfort in knowing that the risk associated with the Credit Union audit was low since the Credit Union had its own internal audit group consisting of various volunteers who checked things out regularly.
Six months after the financial statements were released, a material error was discovered in the financial statements.
Required:
1.Comment with reasons on any professional standards, including professional conduct, which may have been breached during the conduct of this audit engagement.
2. Comment on how audit quality could have been improved in this client audit.
3. Comment with reasoning on potential legal liabilities which may have been created during this audit engagement. Include a discussion of any available defences to these potential liability claims.