Week 6

• What types of offences can auditors be liable for?

  Criminal and civil offences
• What constitutes a criminal offence for auditors?


  A breach of government-imposed law
• Which acts can auditors be prosecuted under?

  The Theft Act, Fraud Act, Companies Act
• What must a claimant prove to succeed in a civil action against an auditor?

  A duty of care exists
• What are the two areas of civil law significant to auditing?

  Contract law and law of tort
• What does contract law establish regarding auditors?

  Principles for auditor liability to clients
• What does the law of tort establish regarding auditors?

  Principles for auditor liability to third parties
• What is the primary legislation for criminal law regarding auditors?

  The Companies Act 2006
• What does it mean to act knowingly or recklessly as an auditor?

  Consciously deciding to take unreasonable risks
• How does negligence differ from recklessness in auditing?

  Negligence lacks conscious decision-making
• What legal obligations arise when an auditor accepts an engagement?

  A legal contract imposing a duty of care
• What is implied in the contract between auditors and shareholders?

  Auditors must exercise reasonable care and skill
• What constitutes negligence in auditing?

  Failure to perform duties with due care
• What can parties to a contract seek under contract law?

  Remedy for breach of contractual obligations
• What does the duty of care require from auditors?

  To exercise reasonable skill and care
• What is the significance of the case Re London and General Bank No. 2 (1895)?

  Defined reasonable care in auditing
• What does the phrase "watchdog not a bloodhound" imply about auditors?

  Auditors should monitor, not investigate deeply
• What is the implication of the case Re Thomas Gerrard and Son (1968)?

  Auditors must investigate when suspicions arise
• What happens when a company fails or fraud occurs?

  Claims may be made against the auditor
• What is the principle of joint and several liability?

  Partly responsible parties can be pursued fully
• What is the law of tort based on?

  A combination of common-law principles and legislation
• What must be shown to establish auditor negligence in tort?

  Duty of care, breach, harm, fairness
• What does foreseeability mean in the context of auditor liability?

  Auditors should anticipate reliance on their work
• What did the case Ultramares Corporation v. Touche (1931) establish?

  No duty of care owed without a contract
• What did Donoghue v. Stevenson (1932) establish regarding duty of care?

  Duty of care exists for foreseeable harm
• What was the significance of Hedley Byrne & Co. v. Heller and Partners Ltd. (1964)?

  Recognized third-party liability for financial loss
• What did JEB Fasteners Ltd. v. Marks Bloom and Co. (1981) confirm?

  Auditors owe a duty of care to foreseeable third parties
• How did the Caparo case change auditor liability?

  Defined duty of care to shareholders as a body
• What are the three criteria established by Caparo for auditor liability?

  Foreseeability, proximity, fairness
• What was the outcome of ADT Ltd. v. BDO Binder Hamlyn (1996)?

  Auditors gave direct assurance verbally
• What was the issue in Royal Bank of Scotland plc v. Bannerman, Johnstone, Maclay & Others (2002)?

  Whether auditors owed a duty of care to RBS
• What did the Court of Session rule in favor of RBS?

  Auditors owed a duty of care to RBS
• What did the ICAEW recommend following the Bannerman case?

  Use a duty of care statement (disclaimer)
• What was the concern regarding standard disclaimers in audit reports?

  They could devalue the audit report
• What did the ICAEW update regarding the independent auditor’s report in 2018?

  Positioning of the duty of care statement
• What is the purpose of the duty of care statement in audit reports?

  Clarify auditor's responsibility to third parties
• What should liability to third parties use?

  Duty of care statement (disclaimer)
• Which firms decided to use the ICAEW's disclaimer?

  All the big four firms
• What did the ACCA Council confirm about standard disclaimers?

  They are not necessarily appropriate responses
• What effect could a standard disclaimer have on the audit report?

  It could devalue the audit report