ACCT 7103 Topic 2 Case study : Question 2

Team members: Ruijing Zheng - 43243411 Thanh Thao Nguyen - 43078510

Outline
Case summary

Questions:
1. Discuss the probable extent of the auditors liability 2. Outline the possible defense(s) the auditor might argue

The relationship between the companies

Audited by

Surfing Life Limited

(30 June 2012)

Free and Stone

Take over by
(15 December 2012)

Sue
(April 2013)

Bright Silver

Evidence given by Bright Silver: Engagement team didnt attend physical year end stock take for all locations.-----------Inventory in Brisbane didnt exist Fail to identify the deficiency of the inventory

What the Audit partner say:

Under time and budget pressure that from the client

Former performance is good

Liability to a third party

Bright Silver is a potential shareholder

The relationship between the companies

Audited by

Surfing Life Limited

(30 June 2012)

Free and Stone

Take over by
(15 December 2012)

Sue
(April 2013)

Bright Silver

The auditor could be sued for their negligence.

4 TESTS:
1. The auditor owed a duty of care to the plaintiff. 2. The auditor breached that duty of care.

3. The plaintiff suffered a loss.

4. The plaintiffs loss resulted in part of wholly from the auditors breach of duty.

Legal case: Scott Group Ltd v. McFarlane [1978] 1 NZLR553

Caparo Industries Plc v Dickman [1990] 1 All ER 568

Application: The auditors not only did not attend all the
physical stocktakes but also failed to uncover the deficiency and obsolescence of stated inventory of Surfing Life in 2012.

Case 1: Caparo Industries Plc v Dickman

Application: House of Lords in Caparo: a statutory audit report is meant only to provide information to the company and its shareholders to exercise collective powers of corporate governance. It not intended as advice to potential investors of those making investment decisions.

=> LIABILITY TO THE CLIENT

Case 2: JEB Fastener Ltd v Marks Bloom & Co.

Application: Bright Silver is better able to assess the likely extent of their losses and can act to protect themselves against losses, rather than relying on the audited report. For example, it can seek independent investigation and verification of the financial

information relevant to its decisions.

NO DUTY OF CARE OWED TO THE THIRD PARTY

Defense 1
Contributory negligence of clients directors

Law: ASA 501, para. 11 and para.21 Case: AWA Ltd v. Daniels Application:
The audit team was under significant pressure and stipulated budget. It is impractical for them to visit all the sites. The client failed to provide sufficient care to the auditors, which, as a result, impairs the auditors objectivity and impartial judgment.

Defense 3
Privity of contract
Law: AGS 1014, para 11 Application: Only the directors (liquidator) of receiver, may sue the auditor for the losses from the auditors negligence. When the audited financial statement was delivered, the contractual relationship was between Surfing Life and Free and Stone => Bright Silver is a third party to Free and Stone. Proximity can not be established unless there is a privity letters.

THANK YOU!