Kevin an accountant prepared financial statements for JACO Enterprises pursuant to a review engagement, which is an intermediate form of financial reporting, less onerous than an audit and more onerous than a compilation engagement, requiring the accountant to make inquiries of management and perform certain analytical procedures to determine if the financial information contained in the client's records is plausible. JACO Enterprises failed to remit over $1 million in provincial retail sales tax during the period December 1985 to December 1991. Notices of assessment were issued by the Ministry of Revenue demanding payment of the unremitted tax plus interest and a 25 per cent penalty. The unremitted sales tax was treated by Kevin as revenue of JACO Enterprises, which resulted in an overpayment of income tax in the amount of approximately $220,000. Eighty per cent of that amount was eventually recovered.
JACO Enterprises brought an action against Kevin for damages.
Note - "The Canadian Institute of Chartered Accountants ("CICA") Handbook requires that the accountant has sufficient knowledge of the business to make intelligent inquiries and that the accountant possess an appreciation of matters that could have a significant effect on the information being reported on"
The CICA Handbook sets out the professional standards that apply to accountants in conducting a review engagement. The CICA Handbook explains that a review engagement consists "primarily of enquiry, analytical procedures and discussion related to information supplied to the public accountant by the enterprise with the limited objective of assessing whether the information being reported on is plausible within the framework of appropriate criteria". "Plausible" is defined as "appearing to be worthy of belief based on the information obtained by the public accountant in connection with the review".
The CICA Handbook also stipulates that an accountant must apply "analytical procedures such as comparing the current and prior period information and considering the reasonableness of financial and other inter-relationship..."
a) Identify and explain the legal issue(s) or subject(s) that arises in this case as a result of Kevin's failure to make intelligent inquiries of the indicated retail sales tax figures despite the glaring discrepancies.
b) With particular attention to the details of the scenario above, explain and advice JACO Enterprises what they must establish for a successful action in court.
c) Discuss the remedy(s) if any, available to any of the parties. Ensure to name the party to whom the remedy outlined is available.