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Matters to consider at planning stage, Professional liability,…
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Professional liability
- measure tht firm taken to minimise the exposure to liability
- criteria to be used in determining whether auditor is liable for negligence
Negligence
- failed to exercise duty of care & skills of a prof auditor
Skill, refer to competency
Caparo case
- auditor's responsibilities are towards all s/h :red_cross: individual s/h
- 3rd party to successfully sue auditor, conditions must be satisfied:
- financial losses occurred
- negligence of the auditor
- auditor is aware of the existence of 3rd party （contractual relationship exist btwn auditor & 3rd party)
- 3rd party relied on the representations made by auditors (eg. financial losses directly attb to the representations)
- Liability to client under Contract Law (engagement letter exist)
- Liability to 3rd parties under Tort of Negligence
- auditor owes due of care
- 3rd parties has close proximity with the users of FS (auditor aware the existence of 3rd party)
- 3rd party rely on FS
- 3rd party's economic decision change if FS prepared differently
- auditor breached duty of care
- 3rd party suffered financial losses due to breach of duty of care
Safety measure b4 audit
- professional indemnity insurance
- limiting liability owed to client
- acceptance of non-high risk client
- letter of engagement (to avoid expectation gap (difference wht client expect the firm to provide & its actual responsibilities))& disclaimer to 3rd party
Safety measures during audit
- seek opinion of legal experts
- maintain high quality audit work (QC)
Misstatement represent
- 2% of rev / total assets, or
- 5% of PBT
:red_flag:In exam, materiality lvl is not given, need to relate to rev, total assets / PBT to form conclusion
jointly & severally liable, not just your own liability
moving from jointly & severally liable to proportionate liability, responsible for own share of liability
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