AF 304 The Auditor’s Legal Liability

Auditors are liable to the plaintiff (Clients) if: Auditors are liable to the third Parties if:

1. A duty of Care is owed to the plaintiff 1. A duty of care is owed to the party ( based on the criteria of Proximity ,
2. Negligence has been proven reliance, and foreseeability)
3. A causal relationship is established for financial loss 2. Negligence has been proven
4. The losses are identifiable and quantifiable 3. Economic loss has been suffered as a result of the negligence (Causal )
4. The losses are quantifiable.

Circumstances (Issues) that give rise to an auditors Liability (lawsuits):

Issue Cases Scenario Findings

1. Due Care 1. Kingston Cotton Mill Co 1896

2. London & General Bank 1895

3. Pacific Acceptance Corporation Ltd Vs

Forsyth 1970

4. The Failure of HIH Insurance

5. Stanilite Pacific Vs Seatan & Ors t/a
Price Waterhouse
2. Negligence “A breech of contractual duty or duty of care
in tort owed to another party”
*Link relevant cases where negligence by
the auditor has been proven.
 Issue Cases Scenario Findings
3. Privity of “Contractual relationships that exists between
Contract 2 or more parties”
“Audit related services performed in
accordance with professional standards unless
the (engagement letter) contains specific
conditions.”
*Link relevant cases where the auditor has
breached the terms of the engagement letter
(contract).

4. Causal 1. Segenhoe Ltd Vs Akins & Ors 1990

Relationship

2. Galoo Ltd Vs Bright Graham Murray

1994.

5. Contributory 1. Awa Ltd Vs Daniels T/a Deloitte

Negligence Haskins & Sells Ors 1992

6. Damages 1. Cambridge Credit Case 1985 & 1987

*Link relevant cases where damages have

been mentioned as a result of the auditors
negligence.
7. Liability to Third 1. Ultramares Corp Vs Touche Niven
Parties 1931.
2. Candler Vs Crane Christmas & Co
1951.
3. Hedley Byrne & Co Vs Heller Partners
1963.
Issue Cases Scenario Findings
4. JBE Fasteners Ltd Vs Marks Bloom &
Co 1981.

5. Twomax Ltd Vs Dickson, McFarlane &

Robinson 1983

6. Caparo Industries Pty Ltd Vs Dickman

& Others 1990

7. Lowe Lippman Figdor & Frank Vs AGC

(Advances ) Ltd 1992.

8. Esanda Finance Corp Vs Peat

Marwick Hungerfords 1994.

9. Columbia Coffee & Tea Case

10. Mutual Life and Citizens Assurance
Co Ltd Vs Evatt 1968.
11. Shaddock & Associates PTY Ltd Vs
Parramatta City Council 1981.