The CPA firm of Winston & Mall was engaged to audit the financial statements of the Fast Cargo Company, a retailer. The auditors tested a sample of 100 disbursement transactions, all of which were to be supported by purchase orders, receiving reports, and invoices. However, tests revealed several instances where purchases had been recorded and paid, although a receiving report had not been filed. These exceptions were noted in working papers prepared by Martin, a staff auditor. Mall, the partner in charge of the engagement, called these exceptions to the attention of Harris, Fast Cargo's CFO, who promised to locate and file the receiving reports. Mall accepted this explanation, did nothing further to investigate, and issued an unqualified opinion on Fast Cargo's financial statements.

Unknown either to Mall or to Martin, Harris, the controller, was engaged in a fraud:

Merchandise was diverted to a private warehouse where Harris leased space and the invoices were sent to Fast Cargo for payment. The scheme was discovered, and a preliminary estimate indicates that the loss to Fast Cargo will exceed $50,000.

Required:

1. Discuss Winston & Mall's liability, if any.

2. What additional steps, if any, should Mall have taken? Explain.