Auditor Liability: For What?

Established the general standard of reasonable skill and care.

Held that the auditor was liable for damage sustained by a company that resulted from their omission to verify the existence of assets that were stated in the balance sheet. It was therefore established that the auditor was required to check accuracy as well as the data in the books (i.e. go beyond the books).

Court held auditor negligent because he didn't check the schedule of bad debts to make sure all were included. It established that auditors were required to relate evidence obtained from different sources.

Auditors must verify assets on balance sheet; specifically to this case, accounts receivable and inventory.

Confirmed/established the following duties:
-exercise due care and skill
-investigate financial affairs for the whole of the relevant financial period
-procedures should be structured so the auditor has a reasonable expectation of detecting material fraud
-report suspicious circumsances promptly to the company's directors
-report to shareholders and material matters discovered during the audit process
-reliance on others is to be regarded as an aid to, not a substitute for, the auditor's own procedures
-if audit failure occurs then the use of inexperienced staff or an absence of an audit programme may indicate auditor negligence.
Also outlined that professional standards and practices must be changed over time to relect changes in economic and business environment.

Highlights danger of relying upon letters of representation and the importance of confirmation and cut-off tests.