Mr Leong spent large sums of money in creating false records and bribing accomplices in order to conceal the fraud from auditors. He insisted that the auditor should sign a "confidentiality" agreement which effectively precluded the auditors from corroborating sales with independent third parties and from examining the service contracts of the directors. This agreement had the effect of preventing the auditor from discussing the affairs of the company with the sales agents.

The fraud was discovered when an unsatisfied director wrote an anonymous letter to the Stock Exchange concerning the reasons for East Factory's growth. The auditors were subsequently sued by a major bank that had granted a loan to East Factory based on interim accounts. These accounts had been reviewed by the auditor and a review report was issued.  (August 2019)

Required:

a)     Discuss whether the auditors are guilty of professional negligence in not detecting the fraud. 

                                   

b)     Explain how can an audit firm minimize its potential for paying damages in cases involving torts?