Tutorial Question - Auditor's Legal Liability

A. Fashion Forward Sdn Bhd (FFSB) applied for a substantial loan RM 300,000 from HSB Bank. HSB Bank insisted that audited financial statements to be submitted before it could extend the credit. An audit was performed by an independent chartered public accountant (CPA) who submitted his report to FFSB to be used solely for negotiating a loan from HSB Bank. Within four months after the loan were granted, FFSB was filed for bankruptcy. HSB Bank brought lawsuits again the CPA for the damages claiming that it had relied on the misleading financial statements and the unmodified financial statement issued by the CPA. The damages can be measured accordingly. It was subsequently learned that the CPA audit working paper reveal negligence and the company (FFSB) is having going concern problem if allowance of debt is written off. CPA also failed to disclose the information that the sophisticated embezzlement scheme by FFSB's chief accountant were made to which he is aware of.

Required:

a. Discuss whether HSB Bank would succeed in its claim against the auditors. Support your answers with relevant common law case.

b. Explain two (2) ways that professions can reduce liability in auditing

B. "Auditor is a watchdog but not a bloodhound".

Required:

Based on the statement above and relevant court case discuss the requirement of auditor to discharge their duty to exercise reasonable care and skill in an audit engagement.