You are the audit partner of the ABC audit firm, assigned to the audit of XYZ Ltd. You issued an unmodified auditor's report for the year ended 30 June 2020. In December 2019, three employees of XYZ Ltd. were charged with systematically and deliberately entering fictitious transactions and embezzling about $9 million. ABC audit firm has been notified by the legal representatives of XYZ Ltd. that they are taking legal action against your firm based on the audit for the year ended 30 June 2020. They claim that you and your audit team were negligent in conducting the audit, due to your failure to identify the activities of the employees of XYZ Ltd. BUACC3741 Auditing Semester 1 2021 Page 5 of 8

Required: a. Describe the nature of the activity that the three employees had engaged in? (2 marks)

b. What are the legal requirements to successfully sue an auditor for negligence? (2 marks)

c. Under what circumstances do you think the ABC audit firm could be found guilty of negligence in this case? (2 marks)

d. Do you think XYZ Ltd was guilty of negligence? Discuss giving reasons for your answer. (2 marks)