Horsebox, Postillion & Co. are a city firm of Chartered Certified Accountants. The firm’s accounts are produced by the administration partner but are subject to audit by Blanket, Mange, another firm of Chartered Certified Accountants. In June 20-6, a partner in Horsebox who was suffering from overwork failed to realise that an error had occurred in the preparation and audit of the Accounts of International Maize Ltd. Stocks of maize in transit had been inadvertently included in the company’s stocks in both the producing country and the receiving country. The company had been acquired by Universal Porage Inc. who have now discovered the mistake. They have given notice that they intend to bring an action to recover damages from Horsebox on the grounds that they relied on the audited accounts for the year ending 30.4.-6 and that they would not have purchased IM had they known of the error. The stock of IM was overstated by £2.4 million as a consequence of the error. The profit of IM was reported as £4.3 million and UP paid £21 million cash for IM. Horsebox carry professional indemnity insurance in the sum of £1 million. The partners of Horsebox dislike each other and rely heavily on Blanket, Mange. No one at Horsebox has informed Blanket, Mange of the pending legal action.

Discussion Questions
1. What auditing procedures might allow Blanket, Mange to discover the existence of
the action?
2. How might the amount of the ultimate award and costs be determined by Blanket,
Mange?
3.  What other hidden tiabilities might Horsebox have at their year end — 31.12.-6?