The directors of LKJ Ltd prepared a forecast of expected profits and dividends and another of acquisitions and disposals of fixed assets in order to support their decision to treat ACT recoverable as an asset and to justify the inclusion of a very small liability in respect of deferred taxation. The auditor examined these forecasts. They appeared reasonable in the light of previous trends and accorded with the impressions gained from discussions with various directors and managers about the immediate future for their areas of responsibility. The directors confirmed their confidence in the assumptions made when drafting these forecasts by reiterating them in the letter of representation. Six months later, the company ran into severe and unexpected difficulties. They did not make any profit in the new financial year and were forced to dispose of some fixed assets, incurring tax on the related chargeable gains. The shareholders were extremely upset to discover that the figures for recoverable ACT and deferred tax in the previous set of financial statements had been based upon projections which subsequent events proved to have been optimistic. Describe the extent to which LKJ's auditor could be accused of negligence. State the assumptions which you have made in arriving at your decision.