You recently completed the audit of Scribe Resources for the year ended 30 June 2020. You were the audit senior for this audit.

The audit partner has just told you that Scribe Resources has gone into liquidation. The financial controller had deliberately overstated the value of their inventory in order to avoid breaching a debt convenant associated with a significant bank loan.

The lawyers for the bank are taking action against the audit partner for not performing an appropriate audit. They believe that a properly conducted audit should have detected the fraudulent financial reporting.

You were not aware of the existence of any debt covenants during the audit, but you were aware that the bank intended to rely on the auditor's report. The overstatement of inventory equated to $1,000,000. This was greater than the materiality threshold you applied during the audit, which was $500,000. You did not attend Scribe Resources' year-end inventory count (stocktake) as you were busy with other audit clients.

Required

What do you think will be the court's decision if the case goes to trial? Explain your answer. In your explanation, identify the 4 elements that would need to be proven and apply them to the facts of the case.