5.26 Negligence, liability to third parties

Franche Brown Ltd was a manufacturer of plant and machinery for a range of industries and specialised in large bespoke plant for food manufacturers. The company had large work-in-progress included in the balance sheet relating to various projects across Australia and New Zealand as well as some in South-East Asia. The annual audit for 30 June 2015 was completed by Royston Tring and Co., a firm of chartered accountants. It signed the auditor's report on 25 August 2015. In September 2015, Doitsch Green Ltd made a successful takeover offer for Franche Brown Ltd.

Within a few months of the takeover, it became apparent to the accountants at Doitsch Green Ltd that the work-in-progress value included in the balance sheet of Franche Brown Ltd was significantly overstated and that many of the contracts would make losses due to a mix of poor costing procedures and even poorer implementation.

Doitsch GreenLtd has sued Royston Tring and Co. for negligence. In the subsequent court case, it was found from a review of the audit working papers files that Royston Tring and Co. had placed reliance on management representations with regard to the degree of completion of the contracts in progress as well as expected completion costs and ultimate recoverability of amounts outstanding.

Required

(a) write a case against Royston Tring and Co. to prove it acted negligently.

(b)Explain whether you think Doitsch Green Ltd would win the case.