Allegations of breach of contract - 2010 audit:
197. In breach of the 2010 Audit Engagement, Moore and Deloitte:
a. did not perform audit services pursuant to the requirements of the Corporations Act;
b. did not conduct the 2010 Audit in accordance with the ASAs;
c. did not adequately audit the 2010 Financial Report;
d. did not adequately perform audit procedures to obtain audit evidence about the amounts and disclosures in the 2010 Financial Report;
e. did not adequately assess the risks of material misstatements in the 2010 Financial Report;
f. did not adequately evaluate the appropriateness of the financial reporting framework, accounting policies used and the reasonableness of the accounting estimates made by management;
g. did not adequately evaluate the overall presentation of the 2010 Financial Report;
h. did not adequately consider internal controls relevant to Hastie Group's preparation of the 2010 Financial Report in order to design audit procedures that were appropriate in the circumstances;
i. did not identify any material weaknesses in the design or implementation of internal controls over Hastie Group's financial reporting;
j. did not use all reasonable skill and care in carrying out the 2010 Audit, being the degree of skill, care and diligence expected of a professional proving services of the same kind.
Particulars
Moore and Deloitte:
a. did not adequately plan and perform the 2010 Audit to obtain reasonable assurance as to whether the 2010 Financial Report was free from material misstatement;
b. did not form an adequate opinion and adequately report on whether the 2010 Financial Report presented to Deloitte by the directors of Hastie was in accordance with the Corporations Act, including:
i. giving a true and fair view of the financial position of Hastie and of the Subsidiaries as at 30 June 2010 and of their performance for the year ended on that date: and
ii. complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001:
c. did not express an adequate opinion on whether the accounting records of Hastie and the Subsidiaries were sufficient and appropriate to provide a basis for their audit opinion on the 2010 Financial Report;
d. failed to have proper regard to the risk of error, misstatement or fraud in the 2010 Financial Report in circumstances where Hastie Group had experienced rapid inorganic growth which created a complex group structure with little integration or accountability;
e. failed to consider whether the amount paid for goodwill on the businesses acquired in the year ended 30 June 2010 had been overvalued;
f. failed to challenge the assumption that none of the $12,040,000 goodwill acquired by business acquisitions during the year ended 30 June 2010 was impaired;
g. failed to conduct their own impairment reviews;
h. did not apply an adequate degree of professional judgment and scepticism to question whether the 2010 Financial Report materially overstated Hastie Group's intangible assets;
i. failed to challenge the valuation of receivables or WIP on construction contracts;
j. failed to consider the financial reporting framework, accounting policies used (or lack of adequate accounting policies), and the reasonableness of accounting estimates made by management, with respect to the valuation of receivables or WIP on construction contracts in circumstances where the Hastie Group's policy for revenue recognition on large construction projects was predominantly based on the percentage completion method, resulting in the potential for timing differences between billings and recognition of revenue in the income statement;
k. failed to assess and report on the processes for the review and timely close-out of construction contracts and the recognition of their true profitability;
I. failed to comply with the requirements of the following ASA and ensure compliance by Hastie Group with the following Australian Accounting Standards:
i. ASA 200, in that they failed to exercise appropriate professional scepticism so as to identify and report the breaches by Hastie Group of AASB 101, 111, 118, 136 and 139 in that adequate provision had not been made against the amounts of contract WIP. debtors and Intangible assets and therefore recognise that assets and profits were overstated and losses were understated (ASA 200 paragraph 20);
ii ASA 220, in that the audit partner failed to direct and supervise the performance of the audit to ensure that it complied with auditing standards so as to identify and report the breaches by Hastie Group of AASB 101, 111, 118, 136 and 139 in that adequate provision had not been made against the amounts of contract WIP, debtors and intangible assets and therefore recognise that assets and profits were overstated and losses were understated (ASA 220 paragraph 25);
iii. ASA 260 and ASA 265. in that, having failed to detect that Hastie Group did not have adequate internal controls and processes in place to meet the accounting requirements of AASB 111 in relation to the recognition and measurement of the value of construction contracts entered into by Hastie or its Subsidiaries, and that provisions against contract debtors and intangible assets were understated, they failed to report that failing;
iv. ASA 300, in that they failed to plan the audit so that it would be performed in an effective manner so as to identify and report the breaches by Hastie Group of AASB 101, 111, 118, 136 and 139 in that adequate provision had not been made against the amounts of contract WIP, debtors and intangible assets and therefore recognise that assets and profits were overstated and losses were understated (ASA 300 paragraph 5);
v. ASA 315, in that they failed to identify and assess the risks of material misstatement through an understanding of each of Hastie and the Subsidiaries, their environment and internal controls, and to communicate material weaknesses to the management and board of Hastie and the Subsidiaries; particularly In an environment where there had been rapid inorganic growth which created a complex group structure with little integration or accountability. Other areas of potential material weakness which were not identified, assessed and reported on included:
(A) cost variation;
(B) unapproved contract variation;
(C) foreign operations;
(D) impairment of intangible assets;
(E) compliance with financial covenants;
(F) Hastie Group's lack of an internal audit function;
(G) its reporting, quality assurance and exception management; and
(H) recognition of costs and revenues, and loss making projects.
vi. ASA 320, in that they failed to properly consider materiality when determining the nature, timing and extent of audit procedures so as to identify and report the breaches by Hastie Group of AASB 101, 111, 118, 136 and 139 in that adequate provision had not been made against the amounts of contract WIP, debtors and intangible assets and therefore recognise that assets and profits were overstated and losses were understated (ASA 320 paragraph 9);
vii. ASA 330, in that they failed to audit, or inadequately audited, the response of Hastie Group to assessed risks so as to identify and report the breaches by Hastie Group of AASB 101. 111. 118. 136 and 139 in that adequate provision had not been made against the amounts of contract WIP, debtors and intangible assets and therefore recognise that assets and profits were overstated and losses were understated;
viii. ASA 500, in that they failed to gather sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion so as to identify and report the breaches by Hastie Group of AASB 101, 111, 118, 136 and 139 in that adequate provision had not been made against the amounts of contract WIP, debtors and intangible assets and therefore recognise that assets and profits were overstated and losses were understated (ASA 500 paragraph 5);
ix. ASA 501, in that they failed to obtain a sufficient understanding of the system of internal control relating to inventory in order to ensure that they obtained sufficient appropriate audit evidence regarding the existence and valuation of inventory at 30 June 2010 (ASA 501 paragraphs 5 and 7 to 9);
x. ASA 508, in that they failed to obtain sufficient appropriate audit evidence regarding legal matters affecting the entity, in particular with respect to disputes associated with construction contracts, as to the probability of any material revenue or expense arising from such matters and the estimated amount thereof and of the adequacy of the accounting treatment of such matters including their disclosure in the financial report (ASA 508 paragraph 5);
xi. ASA 530, in that, in light of the lack of integration of the parts of Hastie Group, they failed to determine appropriate means for selecting items for testing and to consider the attributes of the population when designing their audit samples (ASA 530 paragraphs 5, 35 and 48);
xii. ASA 540, in that they failed to audit, or inadequately audited, the accounting estimates made by the management of Hastie Group, including the fair values attributed by management and related disclosures;
xiii. ASA 545, in that they failed to audit, or inadequately audited, the fair value measurements made by the management of Hastie Group, including related disclosures (ASA 545 paragraph 7);
xiv. ASA 560, in that they failed to adequately consider the impact of subsequent events on material contracts;
xv. ASA 570, in that they failed to adequately consider the appropriateness of management's use of the going concern assumption in the preparation of the financial report in light of the economic downturn in the Middle East and elsewhere;
xvi. ASA 600, in that they failed to perform procedures to obtain sufficient appropriate audit evidence that the work of the other auditor is adequate for the principal auditor's purposes, in the context of the specific assignment (ASA 600 paragraph 14);
xvii. ASAs 700 and 701, in that, having failed to gather sufficient appropriate audit evidence, they wrongly formed the opinion that the financial report was free of material misstatement;
m. failed to comply with the following professional standards:
i. APES 205, in that they failed to take all reasonable steps to ensure that Hastie Group complied with Australian Accounting Standards when performing the audit (APES 205 paragraph 5.5); and
ii. APES 210, in that they failed to comply with auditing and assurance standards (APES 210 paragraph 4.1).
Particulars
The plaintiffs refer to paragraphs 37 to 180 and 191 to 192 above.