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

Hartley & Co, auditors of Brenmoor Ltd, issued an unmodified opinion. Pemberton Bank, which had no contact with the auditor, later relied on the audited financial statements when lending to Brenmoor and suffered a loss. Under the general approach in most common law jurisdictions following the Caparo principles, which factor is most likely to defeat Pemberton's negligence claim?

The bank's claim is most likely to fail because the auditor did not know the statements would be used for a specific lending decision. Under Caparo-type principles, a duty to third parties arises only with knowledge of the purpose and the recipient, so general reliance is insufficient.

  1. AThe auditor did not know that the bank would use the statements for a specific lending decisionCorrect
  2. BThe audit report was signed after the year-end
  3. CThe bank is a larger organisation than the audited company
  4. DThe financial statements were prepared under IFRS

Explanation

Under Caparo-type reasoning, the auditor owes a duty to third parties only where the auditor knew the statements would be communicated to an identified party or class for a specific transaction. Without that knowledge, no duty arises. The other factors have no bearing on whether a duty of care exists.

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