You are an external auditor in-charge of auditing Immorice Bhd (Immorice), a trading company for the year ended 31 March 2021. You are currently testing the company’s accounts receivables One of the procedures you relied upon to test the accounts receivable was accounts receivable confirmation. Your statistical monetary unit sampling leads to selecting 86 (with a total combined valued of RM15,560,968) out of 1,000 accounts receivable listed in the accounts receivable listing (total accounts receivable population was RM40,326,465). Out of the 86 accounts receivable sampled:
a. six (6) of them had value of more than RM1,000,000 each.
b. four (4) of them (1 of which had value more than RM2,500,000) did not respond to the confirmation request even after the 3rd attempt
You decided to abandon confirmation procedure on the four (4) debtors that did not reply after the third attempt. Subsequent inspection of the documentation revealed that there were sales contracts, invoices and purchase orders from all the four (4) non-respond debtors. A post balance sheet check also revealed that there were payments that came in from all the four (4) debtors involved during April 2021. As such, you opined that they represent valid debtors and conclude that the accounts receivable was fairly stated. Upon completion of the audit, you found that Immorice’s other accounts were also fairly stated. You then issued three (3) copies of unqualified audit report to the company, Later in May 2021, the financial statements were found to be misstated by approximately RM5,000,000. Instead of having a net worth of RM3,200,000, the company was actually insolvent. The management of Immorice had falsified the books to avoid bankruptcy, Out of the RM5,000,000 misstatement, RM4,720,000 were due to non-existing trade debtors. The management of Immorice had created fictitious sales contracts with the four (4) fictitious debtors. They had even requested their subsidiary companies to make some payments in April 2021 to make it look as if the payments were from the four (4) fictitious debtors. Your audit failed to detect the fraud committed by the management of Immorice. Relying on Immorice’s audited financial statements, Phizz Resources (Phizz), one of Immorice’s longstanding suppliers, had extended a loan of RM2,000,000 to Immorice. Since the loan has become uncollectible, Phizz seeks to recover the loss from you.
Required: Explain whether Phizz will be able to recover its loan loss from you in a court of law. (Hint: How will you (defendant) and Phizz (plaintiff) argue in order to win the case? Given the facts, who should win the case?)
Please cite the relevant court cases to support your answer.
