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Outline
Case summary
Questions:
1. Discuss the probable extent of the auditors liability 2. Outline the possible defense(s) the auditor might argue
Audited by
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
Audited by
Take over by
(15 December 2012)
Sue
(April 2013)
Bright Silver
4 TESTS:
1. The auditor owed a duty of care to the plaintiff. 2. The auditor breached that duty of care.
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.
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.
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
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.
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