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

Dunmore LLP audits Pallas plc. The partner knows Pallas will use the audited statements to support a loan application to Norvik Bank, and the engagement letter was amended to name Norvik as an intended recipient. Dunmore performed the audit negligently, and Norvik suffered a loss relying on the report. Which is the most likely position regarding Dunmore's liability to Norvik?

A duty of care to Norvik is likely. The auditor knew the bank's identity and that it would rely on the report for a lending decision, which creates proximity and assumed responsibility. Negligence is enough to found liability, provided breach, causation and loss are also shown.

  1. ANo duty exists because only the shareholders are owed a duty
  2. BA duty of care to Norvik is likely, because the auditor knew the purpose and the identity of the reliant partyCorrect
  3. CLiability exists only if Dunmore acted fraudulently
  4. DLiability exists only if Pallas was also insolvent at the date of the report

Explanation

Where the auditor knows the specific third party and the purpose for which the report will be used, proximity and assumption of responsibility are normally established. Negligence, not fraud, is sufficient if the other elements (breach, causation, loss) are met. Insolvency of the client is not a condition of the duty.

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