You are the senior auditor on your team which audits Hunnings Hardware Ltd. You were entirely satisfied with how the audit was conducted for the year ended 30 June 2015 but you have just been advised that the company has gone into voluntary administration due to a shortage of cash. A member of the companys staff has recently found that the finance manager had been fraudulently diverting substantial funds to his private account during that financial year and subsequently, and has gambled the money away. The administrator doesnt expect to be able to pay all liabilities so she is commencing action against your firm for not performing the audit adequately. Her view is that, if properly conducted, the audit should have detected the actions of the finance manager.

On reviewing the audit file you conclude that the audit was planned and performed as required by all relevant auditing standards. Adequate time was spent on the job and all appropriate steps were performed. Nothing suspicious was found during audit testing that would have alerted you to the fraud. The audit files were examined by the audit manager, the engagement partner, and reviewed by a different partner before the unqualified report was issued.

(a) Does your accounting firm owe a duty of care to Hunnings Hardware? Explain why or why not.

(b) Citing relevant case law, what do you think will be the courts decision if the case goes to trial?