Module 10 Auditor Responsibilities: Common Law Flashcards
What is negligence?
A breach of a legal duty of care which results in loss or damage being suffered by another party
What is Caparo Industries PLC v Dickman and others 1990?
- Auditor did not owe a duty of care because the tripartite test of duty of care was not met.
- Auditor’s duty of care to third parties hinges on the subjective question of whether there was sufficient proximity (Precedent)
- The auditor can only be sued for negligence by the body of shareholders as a whole.
What is AWA limited v Daniels, trading as Deloitte Haskins & Sells & Ors 1992
The auditor has a duty of care to the audit client to carry out the audit engagement as per the
terms of the engagement letter
What is Hedley Byrne Ltd v Heller & Partners 1964
- Disclaimer ment that Heller avoided liability BUT
- A duty of care could be owed between parties in a special relationship
What is Royal Bank of Scotland plc v Bannerman Johnstone Maclay and others 2002
- Bannerman did owe a duty of care
- ICAEW issued a technical release recommending that auditors who wish to manage the risk of liability to third parties use a disclaimer in their audit reports as this did not exist in Bannerman case
What is Barclays Bank v Grant Thornton 2015
This tested the ICAEW Bannerman technical release and found it to be valid
What are the factors that can be considered in determining whether a duty of care has been breached
Professional skilled person - A person with a particular skill wil be judged by reference to what a reasonable person with those same skills would do
Probability of injury - if the risk is high then the reasonable person is expected to take greater care
Seriousness of the risk - Take your victim as you find him applies so that in the case of vulnerable person the level of care required in increased
Practicability and cost - If cost to eliminate all risk is excessive compared to the risk of injury arising then there is no breach of duty if all steps are not taken
What is Re Kingston Cotton Mill Co (1896)
- Established that a breach of duty of care can be defined as failure to exercise the level of reasonable skill, care and caution that is appropriate to a particular set of circumstances
- Auditor must do their job with compliance to applicable law and auditing regulations
What is the “but for” test
Test used to determine liability, if the claimants loss would not have occured but for the defendants conduct then the defendant has caused the loss
What is remoteness of damage?
Even when causation is proved, “but for” test passed”, a negligence claim still fail if the damage caused is too remote
No damage can be claimed except as naturally and directly arise out of the wrong done and the eventual outcome was forseeable
What is limited liability agreement?
LLA limits the amount of liability owed to a company by its auditor in respect of any negligence, default, breach of duty of breach of trust
What are the defences in a neglience case?
Contributory negligence - Defence may be relied upon where the claimant has aggravated or exacerbated the injury or damage which they have suffered by their own negligence
Volenti no fit injuria - If it can be proved that the claimant consented (implied or expressly) to a risk in a situation where a defendants actions carry an inherent risk then there is a defence.
Ex turpi cause - A claimant is unable to pursue legal remedy where this arises from their own illegal act
What is Moore Stephens v Stone & Rolls (2009)
The decision provided clarity of the scope of duty of care owed by auditors and the use of the defence ex turpi cause where fraud arises as a result of actions of a sole controller of a company
To establish negligence a claimant must prove:
- Owed a duty of care
- The work was negligently performed
- A quantifiable, reasonably foreseeable loss was suffered
Foreseeability of Harm
The nature of the damages for which a remedy is being sought must be reasonably foreseeable from the perspective of a reasonable person in the defendants postion.
