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Legal Liability of Auditors

Legal Liability of Auditors

4.26 Trust and External Research

In August 2009, the Windsor family sold its electronics business, Windsor Electronics Pty Ltd, to Bargain Electronics Ltd (Bargain) in exchange for shares in Bargain. The Windsor family relied on Bargain's 2008 and 2009 financial reports. The auditors of Bargain, delta Partners, had issued unqualified audit reports for the years 2008 and 2009. In May 2009, it was revealed that Bargain's financial reports contained material misstatements. Bargain filed for bankruptcy and its share became worthless. The Windsor family sued Delta Partners, alleging negligence.


Develop a defence for Delta Partners against the action taken by the Windsor family. Refer to the relevant case law.

Is the Windsor family likely to succeed? Why or why not?

Defence for Delta Partners the action taken by the Windsor family

There are possibilities which can help the Delta Partners to avoid themselves from the case filed against them. If the Delta Partners are able to prove that the malpractice by the accountants of Bargain Electronics are due to the unethical practices and negligence of the business owners. It is not possible for the auditors to revise the structure or the way the business is conducted and if the malpractice or fraud is done due to the negligence of the business structure or rules than it is unjust to hold the auditors responsible for the malpractice (Choi, pp. 3-5).

Success of Windsor Family

Yes Windsor Family can succeed in the case. Here it is important to mention that the possibility of success of Windsor depends on the way they file the case. If the Windsor Family says that they have invested in Bargain Electronics relying solely on the basis of their financial statement and no external investigation or research was done by the company and the main reason of relying on the income statement was that it was un-qualified declared by the Delta Partners auditing firm. They have to prove the point raised by them s and they also have to prove that the malpractice is not due to the negligence on the behalf of owners of the business but on the behalf of the auditors (Bode, pp. 18-20).

4.27 Contributory Negligence

You are the audit partner assigned to the audit of Mybank Ltd (Mybank). You issued an unqualified audit report for the year ended 30 June 2009. In December 2009, four employees of Mybank were charged with systematically and deliberately entering fictitious transactions and embezzling about $10 million. Your firm has been notified by the legal representatives of Mybank that they are taking legal action against your firm based on negligent in conducting the audit due to your failure to identify fraudulent activities of the employees of Mybank.


Outline the major questions that must be addressed in determining whether you, as the auditor, have been negligent in performing the audit. Support your answer by the reference to case law and auditing standards.

Outline the major issues to be determined in deciding whether the company was guilty of contributory ...
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