Auditor Liability - Lecture 7

Question 1

What shapes audit liability?

Answer 1

.External audit
.Internal audit

Question 2

Where do audit liabilities arise from?

Answer 2

Negligent mis-statement in audit reports

Question 3

What is negligence?

Answer 3

Act or omission which occurs because the person concerned has failed to exercise that degree of professional care and skill

Question 4

It is important to distinguish between…..

Answer 4

.Disputes arising from misunderstandings regarding the duties assumed
.Negligence in carrying out agreed terms

Question 5

What are the three issues relating to auditor liability?

Answer 5

1. Nature and scope of auditor’s duty of care
2. Meaning of negligence in breach of this duty
3. Estimation of loss to another party

Question 6

How do auditor responsibilities affect audit liability?

Answer 6

.The extent to which auditors are liable for their negligence is linked to their responsibilities
.However, audit responsibilities are constantly changing

Question 6

How do auditor responsibilities affect audit liability?

Answer 6

.The extent to which auditors are liable for their negligence is linked to their responsibilities
.However, audit responsibilities are constantly changing

Question 7

How is audit quality evaluated?

Answer 7

.Claim to professional status
.Their ability to use professional judgement

Question 8

How did the legal provision introduced in the companies act 1928 affect liability?

Answer 8

Prevented auditors from restricting their liability to the company due to negligence and breach of duty and of trust

Question 9

How does section 310 of the companies act 1985 affect liability?

Answer 9

.Prevents auditors from contracting with the company to limit liability in the public interest
.Opposed by ICAEW

Question 10

How did Caparo industries plc vs Dickman affect the duty of care to the company?

Answer 10

.The auditor of a public company owed no duty of care to the third party
.An auditor owed no duty of care to an individual shareholder in the company
.An auditor owes a duty of care to the company itself

Question 11

How does the Caparo case reinforce the principle-agent theory?

Answer 11

.Auditors report to the members of the company
.But contracts with the company as a corporate entity

Question 11

How did sections 532 and 538 of the companies act 2006 affect liability?

Answer 11

Enables auditors to limit their liability

Question 12

How is the profession accountable to the public?

Answer 12

Profession needs to reassure public interest above self-profit seeking interest

Question 13

How did the Caparo case (1990) affect duty of care?

Answer 13

Ruled that auditor’s owe a duty of care to the company and not to the public

Question 14

How does Miller (1999) argue the moral and ethical degradation of the profession means it cannot serve the public interest?

Answer 14

.Self-interest
.Negligence
.Lack of professional competence
.Intellectual impoverishment