Case: Andre Fu, CPA

Andre Fu, CPA, conducted the audit of Regent Ltd. As part of the preaudit meeting, Fu was advised by Regent's management that its audited financial statements would be presented to the Bank of Mong Kok to secure financing for a significant expansion opportunity. At the conclusion of the audit, Fu issued an unmodified opinion that concluded that Regent's financial statements presented its financial condition, results of operations and cash flows in accordance with HKFRS.

Using these financial statements as well as Fu's opinion on these statements, Regent obtained financing from the following parties: (i) the Bank of Mong Kok, (ii) the Bank of Kowloon and (iii) Maryland Equity Partners (venture capitalists who bought shares of the company). Each of these parties specifically requested audited financial statements and relied on these statements in providing financing to Regent Ltd. Six months after obtaining the financing, Regent's financial condition worsened, and it declared bankruptcy, forcing Regent Ltd. to default on its payments to the Bank of Mong Kok and Bank of Kowloon. In addition, Maryland Equity Partners' investment in Regent Ltd. became worthless.
After the bankruptcy, the parties that had provided financing to Regent Ltd. determined that Regent Ltd. had intentionally misstated its financial statements by recording fictitious revenues and accounts receivable. All these parties filed lawsuits against Fu for failure to identify the fictitious revenues and accounts receivable.

Required:

A Would these third parties more likely pursue litigation against Fu under common law or statutory law? Explain why. (4 marks)
b Distinguish between the following type of third parties: (i) primary beneficiary, (ii) foreseen third parties, and (iii) foreseeable third parties.

Assignment File 13

Auditing II

c Considering the three types of third parties identified in (b), classify and justify (i) the Bank of Mong Kok, (ii) the Bank of Kowloon and (iii) Maryland Equity Partners.

d Assume that Fu's audit did not follow the HKSA but that it did not demonstrate a lack of minimum care or actual knowledge of the misstatements. Given the circumstances noted, how would you assess each of these parties' ability to prevail against Fu in a potential claim?

e Assume that court proceedings concluded that Fu failed to send accounts receivable confirmations to Regent's customers and simply mathematically verified the summary listing of accounts receivable provided to him by Regent. Which of the parties would be likely to prevail in its claim against Fu?