Module 10 Auditor Responsibilities: Common Law

Question 1

What is negligence?

Answer 1

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

Question 2

What is Caparo Industries PLC v Dickman and others 1990?

Answer 2

• Auditor did not owe a duty of care because the tripartite test of duty of care was not met.
• Auditor’s duty of care to third parties hinges on the subjective question of whether there was sufficient proximity (Precedent)
• The auditor can only be sued for negligence by the body of shareholders as a whole.

Question 3

What is AWA limited v Daniels, trading as Deloitte Haskins & Sells & Ors 1992

Answer 3

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 4

What is Hedley Byrne Ltd v Heller & Partners 1964

Answer 4

• Disclaimer ment that Heller avoided liability BUT
• A duty of care could be owed between parties in a special relationship

Question 5

What is Royal Bank of Scotland plc v Bannerman Johnstone Maclay and others 2002

Answer 5

• Bannerman did owe a duty of care
• ICAEW issued a technical release recommending that auditors who wish to manage the risk of liability to third parties use a disclaimer in their audit reports as this did not exist in Bannerman case

Question 6

What is Barclays Bank v Grant Thornton 2015

Answer 6

This tested the ICAEW Bannerman technical release and found it to be valid

Question 7

What are the factors that can be considered in determining whether a duty of care has been breached

Answer 7

Professional skilled person - A person with a particular skill wil be judged by reference to what a reasonable person with those same skills would do

Probability of injury - if the risk is high then the reasonable person is expected to take greater care

Seriousness of the risk - Take your victim as you find him applies so that in the case of vulnerable person the level of care required in increased

Practicability and cost - If cost to eliminate all risk is excessive compared to the risk of injury arising then there is no breach of duty if all steps are not taken

Question 8

What is Re Kingston Cotton Mill Co (1896)

Answer 8

• Established that a breach of duty of care can be defined as failure to exercise the level of reasonable skill, care and caution that is appropriate to a particular set of circumstances
• Auditor must do their job with compliance to applicable law and auditing regulations

Question 9

What is the “but for” test

Answer 9

Test used to determine liability, if the claimants loss would not have occured but for the defendants conduct then the defendant has caused the loss

Question 10

What is remoteness of damage?

Answer 10

Even when causation is proved, “but for” test passed”, a negligence claim still fail if the damage caused is too remote

No damage can be claimed except as naturally and directly arise out of the wrong done and the eventual outcome was forseeable

Question 11

What is limited liability agreement?

Answer 11

LLA limits the amount of liability owed to a company by its auditor in respect of any negligence, default, breach of duty of breach of trust

Question 12

What are the defences in a neglience case?

Answer 12

Contributory negligence - Defence may be relied upon where the claimant has aggravated or exacerbated the injury or damage which they have suffered by their own negligence

Volenti no fit injuria - If it can be proved that the claimant consented (implied or expressly) to a risk in a situation where a defendants actions carry an inherent risk then there is a defence.

Ex turpi cause - A claimant is unable to pursue legal remedy where this arises from their own illegal act

Question 13

What is Moore Stephens v Stone & Rolls (2009)

Answer 13

The decision provided clarity of the scope of duty of care owed by auditors and the use of the defence ex turpi cause where fraud arises as a result of actions of a sole controller of a company

Question 14

To establish negligence a claimant must prove:

Answer 14

• Owed a duty of care
• The work was negligently performed
• A quantifiable, reasonably foreseeable loss was suffered

Question 15

Foreseeability of Harm

Answer 15

The nature of the damages for which a remedy is being sought must be reasonably foreseeable from the perspective of a reasonable person in the defendants postion.

Question 16

Proximity of the relationship

Answer 16

Ensure that the claimant belongs to a determinate class

Question 17

Fair, just and reasonable

Answer 17

Imposing a duty of care would result in more harm than good

Question 18

Avoidance of litigation

Answer 18

• Formalising the basis of the engagement contract
• Identify the risk of potential clients
• Ensure a sound audit approach is followed

Question 19

Companies act 2006 imposes requirements on the use of a LLA

Answer 19

• Auditor can only limit liability by LLA for a particular, specified financial year
• Each LLA must be authorised by the shareholders
• Details of a LLA must be disclosed in the annual accounts

Question 20

In order for a special relationship to exist

Answer 20

• one person must be acting in a professional or expert capacity;
• the other person relies on the advice they are given; and
• the person giving the advice knows or should know that their advice will be relied on.