Audit Problem in Afs

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Audit problem in AFS
American fuel & Supply Inc. use to prepare comparative financial statement for their fiscal year. One their December 31, 1985 financial statement auditor Touche Ross accompanied them by an unqualified audit opinion on February 28, 1986. Several months later Touche Ross discovered that the company’s 1985 financial statement contained a material error. Error was that American Fuel & Supply Inc. billed certain of its customers twice for merchandise that they had purchased; this has overstated AFS revenue by $1 million. This had actually converted net loss into net income for that year. Touche Ross asked AFS officials to recall their financial statement otherwise they would withdraw their audit report and would inform all the users of AFS financial statement but AFS refused to do so. Later AFS and Touche Ross came out of a promise that Touche Ross would only notify AFS’s unsecured creditors which included Chevron Chemical. Touche Ross believed that compromise was unacceptable, they thought they has obligation to the other parties who were replying on their audit report about AFS. But before Touche Ross could do so AFS filed for bankruptcy in April 1987.

Chevron Chemical sued on Touche Ross
After AFS filed for bankruptcy Chevron Chemical sued Touche Ross, alleging that the accounting firm negligently audited AFS’s 1985 financial statements. Chevron Chemical also claimed that Touche Ross had a responsibility to notify it after learning of the error in AFS’s 1985 financial statements.

Court decision on Sued
A Wisconsin state court rejected the allegation that Touche Ross negligently audited AFS in 1985. However, the court ruled, and a Wisconsin state appellate court later agreed, that Touche Ross was negligent as a matter of Law in failing to notify audit report users about the withdrawal of their opinion. Touche Ross has to pay $1.6 million…...

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