You are the audit partner of Simon & Co., a large audit firm that is operating in

Melbourne. Your firm audited ABC Ltd, a custom-made products manufacturing

company. ABC Ltd declared bankruptcy within six months of receiving an

unqualified auditor's opinion on its financial statements for the year ended 31

December 2018.

The XYZ bank initiated a court challenge against your firm on the grounds that

the bank disbursed a $2,500,000 loan to ABC Ltd in May 2019, but ABC went

bankrupt shortly afterwards. The plaintiff alleged that your firm's 2018 audit of

ABC was deficient and argued that the auditors failed to uncover that the value of

ABC's inventories were substantially lower than reported on the balance sheet.

Your audit firm did not issue privity letters to any third party in the past four years.

Required:

With reference to the principles established in common law, explain whether the XYZ

bank is likely to be successful. (8 marks)

2. What are the legal requirements that a third party has to satisfy to

successfully sue an auditor for negligence? (5 marks)

3. Why is independence so essential for auditors? Explain the difference

between independence in appearance and independence in fact.