Situation:

Woodcraft & Co are auditors to Tetrabuild plc, a construction company. Woodcraft & Co have just received a negligence claim from one of their clients bankers Grunsey plc who had lent money to their client, Tetrabuild, after the year end and subsequently lost their money when a construction project Tetrabuild had been involved in went badly wrong and bankrupted them. The claim said that the auditors had failed to identify that the directors had significantly underestimated the losses on the project with the result that the bank, had they known the true position, would not have lent money to Tetrabuild.

Required:

Grunsey plc is claiming its losses from Woodcraft & Co. What advice would you give to Woodcraft & Co in this situation?