You are the external auditor of Jacquis Jaunts Ltd, a company which promotes tours of New Zealand

to Australians and owns a chain of duty-free shops. You have been auditing the company since it was

listed on the Australian Stock Exchange (ASX) 10 years ago. Although the accounts have never been

qualified, you are aware that the company has been making losses for the past three years as a result of

short-term cash flow difficulties. The company has no long-term loans but the bank overdraft is near

its limit at the end of the financial year.

During the financial year, the company upgraded its accounting system to a computer database. A

consultant was hired to aid in the correct changeover of files for this system. At year-end, this new

system had been in place for 6 months, and the directors report they are happy with the way in which

it is operating. You do not have the expertise to review and evaluate the database management system,

so you ask an independent expert to undertake this role. This person concludes that the system appears

reliable and that the changeover was correctly carried out. You have never before audited this type of

system, so you attend some courses to familiarise yourself with its features. Your firm has a standard

work program that you use to test the controls operating within the system.

In your review of the minutes of the board of directors' meetings, you become aware that the New

Zealand parent company, Choice-Bro Ltd (which owns 40% of the shares of Jacquis Jaunts), is

considering making an offer for the remaining shares. This is because the company's share price is

trading well below its net asset backing.

After the audited 30 June 2015 financial statements are published, the takeover offer from Choice-Bro

Ltd proceeds on the basis of an offer price equivalent to the net asset backing of $1.10 per share (as

determined from the financial statements). The takeover results in acceptances of 96% of the issued

capital, and compulsory acquisition proceedings have been instituted for the other 4%.

While these compulsory acquisition proceedings are being instituted, it is discovered that there were

errors in the changeover of the computer system, which resulted in inventory at the duty free stores

being materially misstated. After the subsequent write-down of inventory, a new asset backing of

$0.70 per share is established. Choice-Bro Ltd is suing you for alleged negligence for its loss of $0.40

per share.

Required

With reference to case law and the auditing standards, determine whether or not:

(a) you have failed to exercise 'due care' in the audit of Jacqui's Jaunts; (6 marks)

(b) Jacqui's Jaunts Ltd is guilty of contributory negligence; (3 marks)

(c) you owe a duty of care to Choice-Bro Ltd (assuming you are negligent). (6 marks)