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

Harbor & Lane, an audit firm, issues an unmodified opinion on Zentra Ltd's financial statements. A bank, which was not known to the auditor as a user, lends money to Zentra relying on those statements and later suffers a loss when Zentra fails. Under the approach followed in many common law jurisdictions (the 'Caparo' type test), which factor is most important in deciding whether the auditor owes the bank a duty of care?

The key factor is whether the auditor knew the third party would rely on the financial statements for a specific transaction. That knowledge creates proximity, which is needed for a duty of care. General foreseeability that someone may rely on the audit is not enough.

  1. AWhether the auditor knew the bank would rely on the statements for a specific transactionCorrect
  2. BWhether the financial statements were audited in accordance with ISAs
  3. CWhether the bank is a regulated financial institution
  4. DWhether Zentra paid the audit fee on time

Explanation

Under the Caparo-type approach, a duty to a third party arises where the loss was foreseeable, there was proximity, and it is fair, just and reasonable. Proximity is generally shown where the auditor knew the third party would rely on the statements for a specific purpose or transaction. Compliance with ISAs goes to breach, not to whether a duty exists.

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