5.23 Negligence

StirMed sells a range of medical products mainly through representatives visiting hospitals and doctors. StirMed has been going through lean times recently and managing day-to-day cash flow has become a challenge.

In spite of the cash flow difficulties, the financial report to 30 June 2015 showed reasonable revenue; however, there were high levels of both receivables and payables and the bank overdraft was getting close to its agreed limit. The auditors, Brent, Date and Co, completed their audit for the year ended 30 June 2015 and gave an unmodified opinion.

Within seven months of the year end, StirMed went into liquidation unable to pay its debts. As part of the liquidator's investigations, it became apparent that a major fraud had been carried out by two of StirMed's representatives who had created fictitious sales in order to increase their commission. This resulted in both sales and receivables being overstated by material amounts. The liquidator is questioning the conduct of the auditors in not detecting this fraud. Sales and receivables testing was carried out by Francis, the most junior member of the audit team.

Required

Discuss the legal problems and possible liability of Brent, Date and Co as a result of the above facts.