San Diego State Chapter 6 Joker and Wild LLC Case Study 7-2 Analysis Please read, analyze, complete and submit responses for the two following cases from t

San Diego State Chapter 6 Joker and Wild LLC Case Study 7-2 Analysis Please read, analyze, complete and submit responses for the two following cases from the end of Chapter Six. Please be sure your responses are complete (at least 250+ words each case) and well analyzed. Case 6-2 Joker & Wild LLC
Joker & Wild LLC has just been sued by its audit client, Canasta, Inc., claiming the audit failed to be conducted in
accordance with generally accepted auditing standards, lacked the requisite care expected in an audit, and failed to
point out that internal controls were not working as intended. The facts of the case are that the auditors failed to find
the accounting manager’s misappropriation of assets when he stole inventory and then improperly, knowingly, wrote
down inventory for market declines.
Current market values of inventory were not provided to the auditors despite numerous requests for this information.
The auditors relied on management’s representations about these values, which understated inventory by 10%. The
plaintiff client brought the suit against the CPA firm claiming negligence, asserting the firm’s failure to find the vice
president’s misappropriations of inventory and false valuations damaged the company by prematurely recognizing
losses and then causing large reversals in the subsequent fiscal year when the inventory was sold for 15% above the
original cost. The defendant CPA firm sought to blame the client, claiming Canasta did not cooperate on the audit
and the vice president overrode internal controls.
1. Are the auditors guilty of malpractice? Explain.
2. What defenses are available to Joker & Wild in this case? Explain what they must prove to successfully assert
these defenses.
3. Assume you are not aware of state laws on auditor legal liability. What legal concepts might a court of law use
to resolve the lawsuit?
4. Do you believe the auditors should be held legally liable? Why or why not?
Case 6-6 Kay & Lee, LLP
Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by
prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money
to the client is likely to rely on the audited statements.
After the audit report is issued, the bank that ultimately made the loan discovers that the client’s inventory and
accounts receivable were overstated. The client subsequently went bankrupt and defaulted on the loan. The bank
alleged that the auditor failed to communicate about the inadequacy of the client’s internal recordkeeping and inven-
tory control. Moreover, the bank claims that the auditors were grossly negligent in not discovering the overvaluation
of inventory and accounts receivable.
The auditors asserted that there was no way for them to know that the client included in the inventory account
$1 million of merchandise in transit to a customer on December 31, 2015. The shipping terms were unclear so the
auditors accepted management’s representations in that regard (FOB Destination). As for the receivables, the audi-
tors claimed the client falsified confirmations by sending them to a post office address, retrieving them, and then
confirming the stated balances.
1. What would the bank have to prove to successfully bring a lawsuit against Kay & Lee?
2. What defenses might the auditors use to rebut any charges made about their (deficient) audit?
3. Critically evaluate the auditors’ statements about the inventory and receivables with respect to generally
accepted auditing standards and the firm’s ethical responsibilities.

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