Eraser Limited (Eraser) traded from 1995 until it was taken over in early 2015 by Pencil Limited(Pencil), a local bank, which paid a price equivalent to the net asset backing of Eraser as disclosedin the 2014 financial report. A large portion of Erasers business was issuing loans for investmentproperties in prime locations. While the 2014 financial report of Eraser was being prepared, Pencilsent a privity letter request to Erasers auditors, notifying them of their reliance on the 2014audited financial report, and the reason of their reliance. They received a response from Erasersauditors that no duty of care was owed by the auditors to Pencil.During 2014, a segment of the investment property market in prime locations collapsed, causingsubstantial losses to be realised on the investment property portfolio. It was recognised thatinsufficient security in relation to these properties had been taken out. On additional investigationsit was found that Erasers accountants provided internal and external auditing services to thecompany. The auditors, as part of their internal audit duties, reviewed the internal control systemregarding property investment and had determined in their report that the system was working inaccordance with the companys guidelines. It was also concluded that these guidelines might needto be reassessed as they were very lenient and exposed the company to substantial andunnecessary financial risks in comparison to other lending institutions.The internal audit report was dated after year end 2014, but before the external audit report wassigned. It had also been considered and minuted at a meeting of the audit committee, which washeld before the external audit report was signed. However, any decision was deferred to the nextmeeting of the audit committee. This next meeting was held after the external audit report hadbeen signed. The external audit partner denied any knowledge of this internal audit report.4 Case study adapted from Peter Roebuck & Nonna Martinov-Bennie, Case Studies in Auditing and Assurance, 5th Edition, LexisNexisButterworths, 2010.Deakin University CRICOS Provider Code: 00113BDeakin Business SchoolFaculty of Business and LawMelbourne Burwood Campus, 221 Burwood Highway, Burwood, VIC 3125http://www.deakin.edu.au/business/accounting The losses on investment property have caused significant financial distress to Pencil, which hasapproached you to act as their legal counsel for advice.You have talked to the firm which audited Eraser prior to 2015 and established the following facts: The auditor received many privity letter requests prior to 2015 and had a standardcompany policy of refusing to acknowledge a duty of care in all instances. The audit firms audit manual acknowledged responsibilities to interested parties whoread and rely upon our reports, and this extends beyond the persons who employ us inthe first instance or those to whom the report is addressed initially.Your tasks are:a) Outline issues to consider whether a public accounting firm should or should not provide bothinternal and external auditing services. (6 marks)b) What issues need to be considered in order to determine whether or not a case for negligenceagainst Erasers auditors would proceed? (6 marks)c) Assume Erasers auditors were negligent. To be successful in this case against the auditorswhich issues need to be established? (6 marks)You should include reference to ethical standards, case law, and auditing standards whereappropriate.