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Chapter 4 - The legal liability of auditors. This chapter presents the following content: Establishing the auditor’s duty, reasonable care and skill, negligence claims, liability to clients - recent cases, liability to third parties - early test - special relationship,. | THE LEGAL LIABILITY OF AUDITORS CHAPTER 4 ESTABLISHING THE AUDITOR’S DUTY Society imposes a duty to exercise reasonable care and skill in two ways: Contractual (including statutory) relationship Special relationship between two parties REASONABLE CARE AND SKILL An auditor must exercise the reasonable care and skill expected of a professional. Requires adherence to professional standards in all aspects of an audit. ‘The professional man owes a duty to exercise that standard of skill and care appropriate to his professional status’ (Caparo, 1990). NEGLIGENCE Any conduct that is careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort owed to another person or persons. NEGLIGENCE CLAIMS To be successful in a claim for negligence, plaintiff must prove: Duty was owed to plaintiff by defendant A breach of the duty of care (negligent conduct occurred) Loss or damage was suffered by plaintiff A causal relationship existed between breach of duty by defendant and harm suffered by plaintiff LIABILITY TO CLIENTS Arises both in contract and in tort of negligence. Early cases: London & General Bank (1895) Kingston Cotton Mill (1896) Thomas Gerrard & Son (1967) LIABILITY TO CLIENTS — PACIFIC ACCEPTANCE (1970) Exposition of auditor’s duties and responsibilities: Duty to use reasonable care and skill Duty to check and see for themselves Audit the whole year Appropriately supervise and review Properly document procedures Reliance may be placed on internal controls Duty to warn and inform appropriate level of management Duty to take further action where suspicion is aroused Expectation of discovering material error or fraud Professional standards provide a guide LIABILITY TO CLIENTS — RECENT CASES Cambridge Credit (1985) Segenhoe (1990) Galoo (1994) CONTRIBUTORY NEGLIGENCE Exists where the plaintiff fails to exercise the required standard of care, thus contributing to its own loss. Prior to AWA, such a | THE LEGAL LIABILITY OF AUDITORS CHAPTER 4 ESTABLISHING THE AUDITOR’S DUTY Society imposes a duty to exercise reasonable care and skill in two ways: Contractual (including statutory) relationship Special relationship between two parties REASONABLE CARE AND SKILL An auditor must exercise the reasonable care and skill expected of a professional. Requires adherence to professional standards in all aspects of an audit. ‘The professional man owes a duty to exercise that standard of skill and care appropriate to his professional status’ (Caparo, 1990). NEGLIGENCE Any conduct that is careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort owed to another person or persons. NEGLIGENCE CLAIMS To be successful in a claim for negligence, plaintiff must prove: Duty was owed to plaintiff by defendant A breach of the duty of care (negligent conduct occurred) Loss or damage was suffered by plaintiff A causal relationship existed between
