a.You are the audit partner of Simon & Co., a large audit firm that is operating in Melbourne. Your firm audited ABC Ltd, a custom-made products manufacturing company. ABC Ltd declared bankruptcy within six months of receiving an unqualified auditor's opinion on its financial statements for the year ended 31 December 2018.

The XYZ bank initiated a court challenge against your firm on the grounds that the bank disbursed a $2,500,000loan to ABC Ltd in May 2019, but ABC went bankrupt shortly afterwards. The plaintiff alleged that your firm's 2018 audit of ABC was deficient and argued that the auditors failed to uncover that the value of ABC's inventories were substantially lower than reported on the balance sheet. Your audit firm did not issue privity letters to any third party in the past four years.

Required:

With reference to the principles established in common law, explain whether the XYZbank is likely to be successful.(8 marks)

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b.What are the legal requirementsthat a third party has to satisfy to successfully sue an auditor for negligence?(5 marks)

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c.Why is independence so essential for auditors? Explain the difference between independence in appearance and independence in fact.(6 marks)