ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability
Garrick & Wells audits Norvik Co, and the report is addressed to its members. Norvik's shareholder, Ibsen, bought additional shares after reading the audited statements, which contained a material overstatement of inventory that the auditor failed to detect through negligence. Ibsen sues for the fall in share value. Which statement is most accurate under the typical common law position?
Ibsen's claim is likely to fail because the auditor's duty is owed to shareholders collectively as a body, to enable oversight of management, not to individuals making personal investment decisions. Negligence alone does not create a duty for share purchase losses.
- AThe duty is owed to the shareholders collectively as a body, not to individuals for personal investment decisions, so Ibsen's personal loss claim is likely to failCorrect
- BThe auditor owes an individual duty to each shareholder for any purchase decisions
- CThe claim succeeds because shareholders are always third parties with a contract
- DThe claim fails only if the inventory error was below materiality
Explanation
The auditor's statutory duty runs to members collectively to enable them to exercise control over the company, not to guide individual investment decisions. Hence the claim for loss on additional purchases is likely to fail. Materiality is irrelevant here because the error is stated to be material.
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