Insul Timber LTD (the plaintiff) was a company which operated a wood chip mill in South Australia. The plaintiff was required to appoint an auditor under the Companies Act. The defendant, a firm of professional accountants, was appointed to function as auditor and to express an opinion each year that the accounts of the plaintiff were properly drawn up in accordance with the provisions of the Act to give a true and fair view of the financial affairs of the plaintiff and its profit for the year.

Koh was appointed to the position of manager of finance and administration of the plaintiff on 12 December 2019. Koh was the next senior officer to Oliver who was the general manager of the plaintiff. Koh's office was located at the mill site where he was in charge because Oliver spent only about one-quarter of her time at the mill.

There was authority given by Oliver for employees to use the plaintiff's name to make purchases on their own behalf to obtain benefit of the plaintiff's trade discount. Any such purchases were subject to approval by the employees' supervisors.

In April 2021 Lander, the plaintiff's accountant, issued four invoices totalling $5814.84 to Koh for drawings made by him on the plaintiff's account. This amount was debited to a personal account in the plaintiff's ledger in Koh's name. The invoices were not for purchases made in the plaintiff's name to take advantage of the discount. One invoice was a cash drawing of $1556.34 and another for accommodation charges at a Perth motel for Koh's wife and son. At the time Gray Accounting Practice (the defendant) conducted the audit of the accounts of the plaintiff for the 2021 financial year. The balance of the personal account of Koh stood at $1374.00 after the posting of a journal entry recording a credit of $559.84 to the account which entry the plaintiff claimed was not valid. The plaintiff, however, did not make any claim against the defendant in respect to the 2021 audit.

By the time the audit of the accounts of the plaintiff for the 2022 year was conducted in August 2022 the debit balance in Koh's account was $61275.12 although as of 30 June 2022 the balance was $51576.18. The only credit to the account was a payment by Koh of $255.00. Cheques had been raised during the 2022 year to pay Koh's account at a Myer store and for other purposes including two cash advances totalling $16200 and a transfer of money to a woman in the Philippines who later came to live with Koh and became his second wife.

Koh had no authority from the plaintiff to make these payments. Cheques on the plaintiff's account were issued on the authority of Koh and signed by Koh and countersigned by one of two persons immediately subordinate to Koh.

Lander queried the drawings made by Koh but was told by him that he had the approval of the Chair of the board of the plaintiff to make the drawings. Lander was also told that any furniture which had been purchased by Koh was to be kept by the plaintiff if Koh was to leave the plaintiff's employment. Lander was further told that if Koh wished to take the furniture at that time, he would pay for it upon leaving the plaintiff's employment.

After the conclusion of the 2022 audit Koh made further unauthorised drawings which brought the debit balance of his account to $387,867.84. During the audit for the 2023 financial year the defendant brought the state of Koh's account to the attention of Oliver. Koh was suspended and subsequently disappeared.

At no time during 2022 or 2023 did Lander or either of the counter signatories bring the drawings being made by Koh to the attention of Oliver.

It was with respect to the 2022 audit that the plaintiff claimed the defendant was in breach of its duty. The evidence was that during the conduct of the 2022 audit an employee of the Gray accounting practice obtained a copy of the ledger card recording Koh's personal account and sought an explanation of the balance of the account from Koh and Lander. The employee was given the same explanations by Koh and Lander as Koh had previously given to Lander when queried. The partner of Gray accounting practice responsible for the audit of the plaintiff's accounts gave evidence of their recollection of reporting the matter of Koh's account to Oliver at the end of the 2022 audit. There was also a note made by an employee of Gray accounting practice during the 2022 audit to the effect that they had discussed the balance of Koh's account with Oliver. Oliver in her evidence said that she had no recollection of being informed by the defendant at the time of the 2022 audit as to the balance of Koh's account. Oliver further stated in evidence that if she had been made aware of Koh's account, she would have terminated it immediately.

Required

Advise Insul Timber LTD and Gray Accounting Practice of their legal and professional responsibilities in the above case.

Structure your answer using the following headings

Is the auditor liable for damages to the plaintiff? Begin with your overall advice regarding Gray accounting liability for negligence. (6 marks).

Facts of evidence (4 marks).

Is Insul Timber Ltd negligent? How does this relate to Gray accounting responsibilities (6 marks)

Apply at least 4 appropriate law cases to support your answer. (4 marks).