Gand Co. are a firm of Chartered Accountants. The firm acts as auditors to HI] (Cash and Carry) Ltd, a small wholesaling company which imports electronic consumer goods for sale to the retail trade. The company has been owned and managed for many years by Mr Conn. The closing stock figure of HlJ is usually a material amount. G has not attended the count for several years on the grounds that the counting is always well organised by Mr Conn and no problems have ever arisen in this area.

Shortly before the completion of the audit for the year ended 31 December 1996, G and Co. received the following letter:

Dear Sirs, We are writing to let you know that we are contemplating making a substantial investment in Hl] (Cash and Carry) Ltd.

We have not commissioned an independent report relating to the financial position of this company.

We will place material reliance upon the audited accounts of the company when making a decision as to whether or not to proceed with such an investment.

Yours faithfully, LMN pic G’s audit report stated that the financial statements gave a true and fair view, with no qualifications. Shortly after the report was published, LMN announced that it had purchased all of HIj’s share capital.
Two weeks after the takeover, G received another letter from LMN. This claimed that the closing stock figure in HlJ’s latest annual report had been grossly overstated. The problem was due to the valuation of some very old and obsolete television sets at cost. These sets would require extensive modification to receive programmes in the United Kingdom and would still be unsellable because of their old-fashioned cabinets. LMN claim that this problem should have been identified by G and Co. especially because the sets have been in HIJ’s warehouse for at least three years. LMN’s claim was for two specific amounts:
1 The excessive amount paid for the goodwill in HlJ, which was based on latest reported profits.
2 The amount paid for the obsolete stocks. The purchase agreement with Mr Conn stated that stocks would be purchased at their balance sheet valuations.
You are required to consider the following questions: 1. Have G and Co been negligent?

2 Did they owe LMN plc a duty of care? 3. Is LMN’‘s claim likely to succeed?