Legal Liability Report: Analysis of Audit Firm's Liability in ABC Case

This report analyzes the legal liability of Price Young Andersen, the audit firm for ABC Pet Food Ltd, following the company's liquidation due to financial fraud. The report examines whether the audit firm exercised reasonable care and skill, considering compliance with auditing standards like ASA 240 and relevant case law. It explores how ABC's lawyers might present a case against the auditors, focusing on establishing a duty of care and proving breaches thereof. The report also investigates why the audit partner might offer a significant settlement amount, considering factors like the cost and length of litigation, potential damage to the firm's reputation, and the impact on the company's goodwill. The analysis considers the complexities of audit procedures, fraud detection, and the legal responsibilities of auditors in financial reporting.

Running head: LEGAL LIABILITY
Legal Liability
Name of the Student
Name of the University
Author’s Note

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Table of Contents
1. Whether the Audit Firm Has Acted with Reasonable Care and Skill..........................................3
2. How the Lawyers might present the Case against the Auditors..................................................4
3. Why the Audit Partner May Still Offer a Significant Settlement Amount..................................5
References........................................................................................................................................7

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1. Whether the Audit Firm Has Acted with Reasonable Care and Skill
Whether reasonable skill and care was there in conducting the audit of ABC by Price
Young Andersen is the main issue to ascertain in this case.
One such example is the Pacific Acceptance Case where it was stated that following and
complying with the required audit standards needs to be considered as reasonable care and skills.
As per this case, for the determination of the presence of reasonable care and skills in the actions
of the auditors, the count only determines whether the obligatory audit standards were adhered to
by the auditors (Krambia-Kapardis, 2015).
Another key example that is the Kingston Cotton Mill case states that in case an auditor
exercises reasonable care and skill like another competent auditor, it is believed that reasonable
care and skill was exercised by the auditor (Chandler, 2019).
In the given case of Price Young Andersen and ABC, the audit firm properly complied
with all the standards that were obligatory in the situation for conducting the audit of ABC. The
auditor performed all the required audit procedures and the same were reviewed by the senior
audit partner along with the audit director. The result of the audit work reviewed by the peer
firms shows that all the audit standards and procedures were followed by the auditor. Australian
Auditing Standard ASA 240 is the significant audit standard in this circumstance that states that
the audit needs to be undertaken by the auditors by considering the probability that fraud can
take place in the financial statements; and the same has been followed by the auditor of Price
Young Andersen (Free & Murphy, 2015). Overall, the auditor maintained proper compliance
with the obligatory standards while completing all the required audit procedures. All these

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aspects indicate towards the aspect that reasonable care and skill was present in the audit work of
ABC performed by the auditor.
2. How the Lawyers might present the Case against the Auditors
In line with the class action in Royal Bank of Scotland (RBS) vs. Bannerman
Johnstone MacLay (Bannerman) (2002), Bannerman, the audit partner of APC Ltd, was not
able to recognize the ongoing financial fraud and material misstatements in the company; and
based on the unqualified audit report of Bannearman, RBS provided APC Ltd with bank
overdraft. Soon APC Ltd became insolvent and RBS filed a lawsuit against Bannerman as it was
did not receive the money of overdraft provided to APC Ltd. It was proved in the case that there
was a duty of care between Bannerman and APC Ltd and it should be conscious of the fact that
RBS would use the audited financial statement for the purpose to make decision (Heald, 2018).
Considering the facts of the above-mentioned case, the need for the lawyers of ABC is to prove
the fact that there is a duty of care relationship between the auditor and the audit client for
presenting the case against the auditor. More specifically, the lawyers need to prove the
following four steps:
1. It needs to be established by the lawyers that the audit firm owes a duty of care to ABC
by stating that the users of the financial reports of ABC would use the audited financial
statements provided by Price Young Andersen for making different decisions (Laing &
Hoy, 2018).
2. It is also needed to be proved by the lawyer that Price Young Andersen breached the
duty of care of ABC as the ongoing financial statement fraud conducted by ABC’s

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Finance Director was not detected by the auditors of Price Young Andersen which was
the main reason for the breach of duty of care.
3. The lawyers need to present the monetary value of the total damage suffered by ABC
while presenting the case. It is needed for the auditors to calculate the loss and damaged
caused to the investors, creditors and lenders of ABC in monetary value for presenting to
the court (Rahman & Bremer, 2017).
4. The lawyers will only be able in presenting the case properly when they can verify that
the violation of the duty of care of by Price Young Andersen was the main cause for the
loss or incurred by ABC and its stakeholders like investors, creditors, lenders and others
(Rahman & Bremer, 2017).
3. Why the Audit Partner May Still Offer a Significant Settlement Amount
The presence of certain factors can be seen that may create pressure on the audit partner
to offer a major amount to ABC for settling the case without hearing the final verdict. Three
most important factors are mentioned below:
1. Most of the court litigations have the tendency of becoming lengthy; at the same time
they become costly affairs for the involved parties. Therefore, the audit partner of Price
Young Andersen may have offered ABC the significant settlement amount for avoiding
lengthy and costly court cases (Grenier, Pomeroy & Stern, 2015).
2. In case the decision does not go in the favor of Price Young Andersen, the audit firm can
suffer from negative reputation and negative publicity in the professional accounting
industry. Since the name of Price Young Andersen can get badly affected, the case mat
be settled through providing the settlement amount (Bronson, Ghosh & Hogan, 2017).

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3. Reputation and goodwill of the audit companies badly suffer in case they involve in court
cases associated with legal disputes. The audit partner may want to settle the case by
providing the significant amount for avoiding such situation (Grenier, Pomeroy & Stern,
2015).

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References
Bronson, S. N., Ghosh, A., & Hogan, C. E. (2017). Audit fee differential, audit effort, and
litigation risk: An examination of ADR firms. Contemporary Accounting
Research, 34(1), 83-117.
Chandler, R. (2019). Auditing and corporate governance in nineteenth century Britain: the model
of the Kingston Cotton Mill. Accounting History Review, 29(2), 269-286.
Free, C., & Murphy, P. R. (2015). The ties that bind: The decision to co‐offend in
fraud. Contemporary Accounting Research, 32(1), 18-54.
Grenier, J. H., Pomeroy, B., & Stern, M. T. (2015). The effects of accounting standard precision,
auditor task expertise, and judgment frameworks on audit firm litigation
exposure. Contemporary Accounting Research, 32(1), 336-357.
Heald, D. (2018). Transparency‐generated trust: The problematic theorization of public
audit. Financial Accountability & Management, 34(4), 317-335.
Krambia-Kapardis, M. (2015). Auditors and fraud detection: an elusive role?. In Research
Handbook on International Financial Crime. Edward Elgar Publishing.
Laing, G. K., & Hoy, S. (2018). A Retrospective of Professional Liability of Auditors in
Australia. The Journal of New Business Ideas & Trends, 16(1), 44-55.
Rahman, K. M., & Bremer, M. (2017). The Implications of The Toshiba Accounting Scandal for
auditor Liabilities in Japan. Nazan University, (1704), 1-17.