Module 10 Auditor Responsibilities: Common Law

Question 1

What is common law?

Answer 1

The system of laws based on decisions made by judges in court. Based on judicial precedent - the principle that the decision made by the court is binding on other courts in later cases involving a similar set of circumstances and the same point of law.

Question 2

What is negligence and how can a claimant prove negligence?

Answer 2

Negligence is a breach of legal duty of care which results in loss or damage being suffered by another party.

Claimant must prove that:

1. The accountant owed a duty of care to the claimant
2. The work was negligently performed
3. The claimant suffered a quantifiable, reasonably forseeable loss because of the accountants negligence.

Question 3

Duty of care and Caparo vs Dickman ?

Answer 3

The current precedent for duty of care to third parties and shareholders has been set by Caparo vs Dickman. This case determined that the auditors duty of care to third parties is limited to individuals with whom the auditor has a close and direct relationship with. This is known as principle of proximity.

Question 4

What does AWA vs Deloitte entail ?

Answer 4

That the auditor has a duty of care to the audit client to carry out the audit engagement as per the terms of the engagement letter

Question 5

A duty of care is owed between parties in a special relationship due to Byrne Ltd Vs Heller & partners. what factors must exist for a special relationship to be material?

Answer 5

1. One person must be acting in a professional or expert capacity
2. The other person relies on the advice they are given
3. The person giving advice knows or should know that their advice will be relied on

Question 6

Under what circumstance can a be compensated if duty of care has been breached?

Answer 6

Personal injury
Financial loss directly connected to personal injury
Damage to property

Question 7

What measures should an auditor take to prevent litigation?

Answer 7

1. Formalising the basis of the engagement contract. Auditor should ensure that there is an engagement letter so that responsibilities have been set out in writing and agreed by client.
2. Identifying the risk profile of potential clients. Appropriate procedures should be in place to prevent situations where incredibly risky clients are taken on
3. Ensuring a sound audit approach is followed.
   Ensuring audit staff are well trained
   Ensuring documentation standards are adhered to
   Ensuring all work is reviewed effectively.

Question 8

What is a liability limitation agreement (LLA)?

Answer 8

A liability limitation agreement 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 9

What are the requirements on the use of LLA set out by CA 2006?

Answer 9

CA 2006 does not stipulate how the limit should be calculated.

1. Auditors can only limit liability by LLA for a particular, specified financial year.
2. Each LLA must be authorised by the shareholders
3. Details of LLA must be disclosed in the annual accounts

Question 10

What are the most commonly relied upon defences in a negligence case?

Answer 10

1. Contributory negligence - Claimant has aggravated or exacerbated the injury or damage which they have suffered by their own negligence
2. Volenti non fit injura - Where it can be proved that the claimant consented to a risk in a situation where a defendants actions carry inherent risk. The claimant was fully aware of the risk and they consented.
3. Ex turpi causa - The claimant is unable to pursue legal remedy because of their own illegal act.