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Halimah Binti Sulaiman
Siti Rasyiqah Binti Sadali
Nur Amalina Binti Mustaf-Jab
Nurul Amirah Binti Mohd Rodhi
Fatin Aqila Binti Mohd Ibrahim

. Q1C) (i) Explain whether the auditor has exercised due care in the audit Prospek Teguh Sdn Bhd (ii)Discuss the possible liability of the auditor if a lawsuit is initiated by Oct Bank against Nadyah & Sarinah. Quote relevant legal cases to support answer.Question 16 (April 2010.

Al (1931) The auditor did not owe duty of care to the plaintiff based on the doctrine of privity of contract. The court quote that. As such. there is a strong possibility that the auditor has not exercised due care in the performance of the audit. there was no evidence that the auditor had carried out additional audit procedures in order to determine the impact of internal control weakness on the truth and fairness of Prospek Teguh Sdn. Example of Case = Ultramares v Touche Et. But.e. the auditor had encountered a major internal control deficiency. ' If a liabilty for negligence exist in this case. the liability of the auditors is no limit'. Bhd's financial statement.Answer (i) In the case of Prospek Teguh. . an accountant may be exposed to a liability in an indeterminate amount for an indeterminate time to an indeterminate class i. the matter was not highlighted to the top management. In addition.

1) Whether the auditor owe duty of care . the following conditions might need to be tested before auditor's liability is determined.Yes. Oct Bank is a third party that should not have relied on the auditor's report because the audit report was issued to the shareholders in accordance with the statutory requirements.Answer (ii) Based on privity of contract. It may also be argued that the auditor is not responsible for internal control weakness and detection of fraud. . If legal action is initiated by Oct Bank. The auditor failed to put a disclaimer in the audited report as it was only prepared for the client.

Continued… 2) Whether the auditor breach the duty of care . it leads to the damages of the 3rd party.Yes.Yes. .Yes. The loss suffered by the third party due to client defaulted in their subsequent payments. 3) Whether the client and 3rd party (plaintiff) suffered loss . 4) Any causal relationship between the breach of duty of care with the plaintiff damages. Since the auditor did not perform their duty accordingly. The auditor failed to inform the management pertaining to the major internal control weaknesses that they have found. .

.Conclusion Hence. since all the elements have been fulfilled. then there is a high possibility that Oct Bank will win the case.

they were liable to the third party. or to whom they know their employer is going to show the accounts so as to induce him to invest money. . Auditor to any foreseeable party that might suffer losses arising from reliance on the audited accounts. The absence of a contract did not constitute a valid defence. if the third party was deemed to be primary beneficiary (is one about whom the auditor was informed before conducting the audit) Candler vs.Accountants owe a duty to their employer or client and also to any third person to whom they themselves show the accounts.It was established that auditor's liability to third party is similar to their liability to clients. Touche Niven & Co (1931) .if an auditor was negligent. Crane. Heller & Partners (1963) . Marks.The court held that when there is sufficient degree of proximity or neighbourhood. Ultramares Corporation vs. Bloom & Co (1981) . a duty of care is owed to the third party. the auditor did not owe a duty of care to the plaintiff. The court held that in absence of a contractual relationship between the parties. Hedley Byrne & Co vs.Principle established from other cases suggested that an auditor might also be held responsible to third parties. JEB Fasteners Ltd vs. Christmas & Co (1951) .

(ii) Explain the necessary conditions or tests that must be met in order to establish whether a duty a care can be imposed on the auditor.Question 20 (June 2012. . Q4B) (i) Explain four methods that may be used by an audit firm to reduce its exposure to lawsuits.

 Establish and maintain high standards of quality control. The written terms of the engagement should help the auditor minimize any potential risk of exposure which might arise as a result of any misunderstanding as to the auditor's responsibilities.  Investigate prospective clients thoroughly. Responsible public accountants need to carry such insurance for the protection of their clients. .  Be prepared to issue a privity letter.  Maintain adequate professional indemnity cover.Answer (i)  Use engagement letters for all professional services. on request. The purpose of the letter is to establish a relationship with required foresee ability and proximity. Litigation can be limited by avoiding clients that are in poor financial health or managed by directors whose business ethic or competence are suspect as a result of past association with failed corporations. and thus a duty of care by the auditor to the third party. The dominant objective of quality control is the assurance that all the firm's work complies with required professional standards.

just and reasonable that the law should be impose the duty of care on the party for the benefit of the other. .Answer (ii) • Whether the damage or loss is foreseeable • Whether there existed a relationship of proximity between the parties • Whether it is fair.