In completing the audit of Darwin Ltd for 30 June 2019, PKK Accountancy Services signed an unmodified (clean) audit report. During the course of the audit, certain anomalies were found in the purchases system. It became apparent that a number of invoices from subcontractors by-passed the normal purchase ledger processes and were authorised directly by the Chief Operations Officer (COO). PKK did not report these issues to management because no material errors were found.

Subsequently, it was found that the COO was engaged in a significant fraud where some subcontractors were encouraged to submit inflated invoices, the COO would authorise them and the COO and the subcontractor shared in the extra amount paid.

Darwin Ltd is now seeking to sue PKK Accountancy Services for negligence for not detecting the fraud. PKK has indicated that it is not their job as auditor to detect fraud, but merely to express an opinion on the financial report and as no material errors were found during the audit then there is no negligence.

Required:

a. Discuss whether the accounting firm has acted negligently (refer to relevant cases to support your answer). (7 marks)

b. Explain whether the accounting firm owes a duty of care to Darwin Ltd. (3 marks)