ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability

Ashgrove & Partners audits Velda Co, a listed company. In reviewing a negligence claim brought by Velda after an undetected misappropriation by the finance director, the firm's lawyers note that the audit file shows the engagement team accepted management's explanation for unusual journal entries without corroboration, despite ISA 240 requiring professional scepticism and journal entry testing. Velda's own board also failed to enforce segregation of duties over the same period. Which is the most accurate assessment of the position?

The uncorroborated acceptance of management explanations likely evidences breach of the auditor's standard of care under ISA 240. Velda's own failure to maintain segregation of duties may support a contributory negligence argument reducing damages, but it does not remove the existing duty of care.

1. AThe failure to corroborate explanations is likely evidence of breach of the standard of care, but Velda's own weak controls may support a contributory negligence argument to reduce damagesCorrect
2. BVelda's weak controls fully remove any duty of care owed by the auditor
3. CBecause fraud was committed by management, the auditor cannot be liable in any circumstances
4. DContributory negligence applies only to claims brought by third parties