Your audit partner Brett Smart was entirely satisfied with how the audit was conducted for the year ended 30 June 2021 for Lenders Ltd. Since you were the team's senior auditor, you have just been advised that the company (Lenders Ltd) has gone into voluntary administration due to a cash shortage. A company staff member has recently found that the finance manager had been fraudulently diverting substantial funds to his private account during that financial year and subsequently has gambled the money away. The administrator doesn't expect to be able to pay all liabilities, so she is commencing an 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.

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 manager examined the audit files, and the audit partner, and reviewed by a different partner before the unqualified report was issued.

Required

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

(b) Citing relevant case law, what will the court decide if the case goes to trial?

(c) Even if the firm is convinced that the audit was conducted with due care, explain why they may offer Lenders Ltd a substantial settlement amount without a court hearing