Question 2Squirrel & Squirrel is a firm of accountants.Nancy is a partner in the audit team. She has recently been appointed as the auditor for Brick Ltd(Brick), which is the parent company of a corporate group in the construction sector. Nancy is veryexcited about this role as it is her first appointment to an ASX listed company.However, as Nancy starts the audit, she realises that Brick has not been including the liabilities ofsome of its controlled entities in its financial reports. As a result, it has not complied with theAustralian accounting standards and its performance appears much better to the market than itwould otherwise be.She also comes across several irregular and undisclosed payments from Brick to entities connectedwith Bess’ cousin. Bess is refusing to provide Nancy with the materials she needs to check on thepayments. Bess ‘accidentally’ locked Nancy in a storage room when she started to ask her questionsabout those payments.Nancy’s is considering going to the Chair of the company’s audit committee to see if they can resolvethe problems directly.Advise Nancy on her rights, obligations and liabilities in respect of this audit.

Nancy, as an auditor, has a professional obligation to ensure that the financial statements of Brick Ltd are presented fairly and in accordance with the Australian accounting standards. This includes the consolidation of financial statements of all controlled entities. If Brick Ltd is not including the liabilities of its controlled entities, it is in violation of these standards.

Nancy's first obligation is to communicate these issues to the management of Brick Ltd. If the management fails to take appropriate action, she should escalate the matter to those charged with governance, such as the audit committee or the board of directors.

Regarding the irregular and undisclosed payments, Nancy has a responsibility to investigate these transactions. If she suspects fraud, she is required to communicate this to the appropriate level of management and, if necessary, to the audit committee or the board of directors.

If Nancy is prevented from obtaining necessary audit evidence, as seems to be the case with Bess' refusal to provide materials and her being locked in a storage room, she may need to consider the implications for her audit report. If she is unable to obtain sufficient appropriate audit evidence, she may need to issue a qualified opinion, a disclaimer of opinion, or an adverse opinion.

Nancy also has a right to access all necessary information for the performance of her audit. If she is being denied access to necessary information, she may need to consider legal recourse.

Finally, Nancy should be aware of her potential liability. If she fails to report a material misstatement in the financial statements, she could potentially be held liable for any losses suffered by third parties who relied on those financial statements.

In conclusion, Nancy should communicate her findings to the management and, if necessary, to those charged with governance. She should also consider the implications for her audit report and her potential liability.