LIABILITIES OF AN AUDITOR

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Fundamentals of Auditing ACC 311

Lesson 08

LIABILITIES OF AN AUDITOR

Auditors' Liabilities

· Civil Liabilities (arising from law suits/Liability for negligence)

· Under law of contract (initiated by the audit client)

· Under law of tort (initiated by other users of FS)

· Criminal Liabilities

Under sections 157, 255, & 257

Against charges of forgery (evidence created / documents forged etc.)

Against false statement (regarding opinion in report)

Civil Liabilities

Civil liabilities arise in the situation when there is absence of reasonable care and skill that can be expected

of a person in a set of circumstances.

When negligence of an auditor is being evaluated, it is in terms of what other competent auditors would

have done in the same situation

Fundamentals of Auditing ACC 311

Jeb Fasteners v Marks Bloom (1980)

The plaintiff acquired the share capital of the company. The audited accounts, due to the negligence of the

auditors, did not show a true and fair view of the state of affairs of the company. It was accepted that at the

time of the audit the defendant auditors did know of the plaintiffs but did not know that they were

contemplating a take over bid.

HELD: whilst recognizing that the auditors owed a duty of care in this situation. It was decided that the

auditors were not liable because the plaintiff had not suffered any loss. It was proved that the plaintiffs

would have bought the share capital of the company at the agreed price whatever the accounts had said.

Therefore, whether or not a duty of care existed was not directly relevant to the decision.

How to minimize the liabilities

· Not being negligent

· Following the ISAs

· Agreeing the engagement letter

· Defining in report the work undertaken

· Defining the purpose for the report

· By limiting liabilities to third parties

· By defining the scope of professional competence

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