Module 10 - Auditor Responsibilities: Common Law

Question 1

To establish negligence and seek damages a, claimant must prove that:

Answer 1

1. The accountant owed a duty of care to the claimant
2. The work was negligently performed (that is, there was a breach of the duty of care)
3. The claimant suffered a quantifiable reasonably foreseeable loss because of the auditors negligence

Question 2

In establishing a duty of care, three factors are considered:

Answer 2

The loss arising was reasonably foreseeable

A close and direct relationship existed

The imposition of a duty of care was fair, just and reasonable

Question 3

The auditor can have a duty of care to three groups:

Answer 3

Third parties

Audit clients

Shareholders

Question 4

The standard of reasonable care requires:

Answer 4

The person concerned should do what a reasonable person would do and not what a reasonable person would not do.

The standard of a professional or skilled person will be higher

Question 5

There are certain quality control measures firms can put in place to try to avoid negligence claims including:

Answer 5

Formalising the basis of the engagement contract

Identifying the risk profile of potential clients

Ensuring a sound audit approach is followed

Question 6

Three most common defences against a negligence claim are:

Answer 6

Contributory negligence

Volenti non fit injuria

Ex turpi causa

Question 7

Number of cases to be aware of in relation to negligence in the UK:

Answer 7

Caparo v Dickens

AWA Limited v Daniels

Hedley Byrne v Heller & Partners

RBS v Bannerman Johnstone Maclay and other

Barclays Bank v grant Thornton

Kingston cotton mill

Moore stephens v Stone & Rolls

Question 8

What is common law?

Answer 8

The system of laws based on decision made by judges in court

Question 9

What is common law based on?

Answer 9

The concept of judicial precedent

That is, the principle that the decision made by a court is binding on other courts in later cases involving a similar set of circumstances and the same point of law

Question 10

Negligence definition

Answer 10

A breach of legal duty of care which results in loss or damage being suffered by another party

Question 11

To establish negligence and seek damages, a claimant must prove that: (with businesses and accountants)

Answer 11

Accountant owed a duty of care to the claimant

The work was negligently performed

The claimant suffered a quantifiable, reasonably foreseeable loss because of the accountants negligence

Question 12

The courts will only make an award of damages in relation to a negligence claim if:

Answer 12

It can be proved that a duty of care was owed to the claimant

Question 13

Specifically in audit, there is a potential duty of care to three groups of people:

Answer 13

Audit clients

Shareholders of those clients

Third parties

Question 14

Caparo v Dickman (Fidelity one - page 184)

Answer 14

Try recount if can’t look at page - too long to right all down

Question 15

Principle of proximity (establishing duty of care)

Answer 15

The idea of restricting duty of care to those with whom there is a close and direct relationship

Question 16

Foreseeability of harm (establishing duty of care)

Answer 16

Nature of the damage must be reasonably foreseeable from the perspective of a reasonable person in the defendants position

Question 17

Proximity of relationship (establishing duty of care)

Answer 17

Claimant must belong to a determined class

Someone who reasonably foreseeable may suffer damage

Question 18

Even if the nature of the damage is foreseeable and there is sufficient proximity between defendant and claimant, can a court sometimes declare there to not be a duty of care?

Answer 18

Yes

This can create a whole host of issues

Question 19

Duty of care to audit clients (establishing duty of care). How is the engagement letter useful here?

Answer 19

It sets out the responsibilities of the auditor whilst performing the statutory audit

Question 20

AWA Likited v Daniels - 1992 case. What happened? - page 186

Answer 20

Too long to write here

Question 21

Hedley Byrne Ltd v Heller & Partners (1964). What happened? Page 187

Answer 21

Too long to write here

Question 22

In order for a special relationship to exist, a number of factors must be in place:

Answer 22

One person must be acting in a professional or expert capacity

The other person relies on the advice they are given

The person giving the advice knows or should know that their advice will be relied on

(If these conditions are met - a duty of care arises)

Question 23

Royal Bank of Scotland plc v Bannerman Johnstone Maclay and Others (2002). What happened? - page 188

Answer 23

Too long to write here

Question 24

Barclays Bank v Grant Thornton (2015). What happened? - page 188

Answer 24

Too long to write here

Question 25

Who is the audit report addressed to?

Answer 25

The shareholders of the company

Who were responsible for appointing the auditor

Question 26

Caparo v Dickman (1990). What happened? - page 189

Answer 26

Too long to write here

Question 27

To establish negligence and seek damages, a claimant must prove what?

Answer 27

The accountant owed a duty of care to the claimant

The work was negligently performed

The claimant suffered a quantifiable, reasonably foreseeable loss because of the auditors negligence

Question 28

A duty of care can be established where?

Answer 28

The economic loss arising was reasonably foreseeable

There was a close and direct relationship between the defendant and claimant

The imposition of a duty of care is to be fair, just and reasonable in the circumstances

Question 29

The auditor can have a duty of care to three groups

Answer 29

Third parties

Audit clients

Shareholders

Question 30

The standard of reasonable care requires…

Answer 30

That the person concerned should do what a reasonable person would do and not what a reasonable person would not do

Question 31

There are a number of factors that can be considered in determining whether a duty of care has been breached:

Answer 31

Professional / skilled persons - higher test than reasonable person test

Probability of injury - is risk is high, person is expected to take greater care to ensure duty of care is not breached

Seriousness of the risk - if dealing with more vulnerable (eg children) level of care is greater

Practicability and cost - defendant is not expected to eradicate the risk of injury or loss - just take reasonable precautions

Question 32

Re Kingston Cotton Mill Co (1896). What happened? - page 191

Answer 32

Too long to write here

Question 33

A claimant must have a quantifiable loss. Examples include:

Answer 33

Personal injury

Financial loss directly connected to personal injury. Eg loss of earnings

Damage to property

Question 34

What is the ‘but for’ test?

Answer 34

If the claimants loss would not have occurred but for the defendants conduct - then the defendant has cause the loss

Vica versa

Question 35

Even where causation is proved, a negligence claim can still fail if:

Answer 35

The damage caused it too remote

Question 36

The most common remedy for loss or damage suffered due to an auditors negligence is?

Answer 36

Financial compensation

Question 37

Auditors should take measures to prevent negligence and hence avoid litigation claims being raised against them.

These approaches should include:

Answer 37

Formalising the basis of the engagement contract

Identifying the risk profile of potential clients

Ensuring a sound audit approach is followed

Question 38

(Ensuring a sound audit approach is followed)

Compliance with quality control procedures will also reduce the likelihood of litigation. Such as:

Answer 38

Ensuring audit staff are adequately trained and supervised

Ensuring that documentation standards are adhered to

Ensuring all work is reviewed effectively

Question 39

What does a liability limitation agreement do?

Answer 39

Limits the amount of liability owed to a company by its auditor in respect of

any negligence, default, breach of duty or breach of trust,

occurring in the course of the audit for which the auditor may be responsible in relation to the company

Question 40

What is an LLA?

Answer 40

Liability Limitation Agreement

Question 41

The CA 2006 imposes a number of requirements on the use of an LLA:

Answer 41

Auditors can only limit liability by LLA for a particular, specified financial year

Each LLA must be authorised by shareholders

Details of an LLA must be disclosed in the annual accounts

Question 42

What is a prima facie case?

Answer 42

One where the pursuer has established, on the balance of probabilities that they were owed a duty of care

And the defendants failure to achieve standards resulted in a loss or injury

Question 43

The most commonly relied upon defences in a negligence case are:

Answer 43

Contributory negligence

Volenti non fit injuria

Ex turpi causa

Question 44

What is contributory negligence

Answer 44

Where the claimant has aggravated or exacerbated the injury or damage which they have suffered

Question 45

What is Volenti Non Fit Injuria?

Answer 45

Where it can be proved that a claimant consented to a risk in a situation where a defendants actions carry an inherent risk.

Then the defendant will have a defence

Question 46

In order for a defendant to be successful with Volenti non fit injuria, what must they prove?

Answer 46

That the claimant was fully aware of the risks and they consented to them

Question 47

If Volenti non fit Injuria is established, what will it provide?

Answer 47

The defendant with a complete defence

They will be exonerated from paying damages altogether

Question 48

What is Ex turpi causa?

Answer 48

The claimant is unable to pursue legal remember where this arises from their own illegal act

Question 49

Moore Stephens v Stone & Rolls (2009). What happened? Page 197

Answer 49

Too long to write here

Question 50

There are certain quality control measures firms can put in place to try to avoid negligence claims including:

Answer 50

Formalising the basis of the engagement contract

Identifying the risk profile of potential clients

Ensuring a sound audit approach is followed