ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability
Zetland LLP audited Kestrel Ltd. Kestrel's director, Mr Obi, was in discussions with Veritas Capital about a takeover. Zetland's partner knew the audited statements were being provided to Veritas for the takeover and had been told Veritas would rely on them. Veritas bought Kestrel at an inflated price because of a negligent audit failure. Which statement best describes Zetland's position?
A duty of care to Veritas is likely, because Zetland knew the statements would be given to Veritas for a specific takeover and that it would rely on them. The duty is limited to that known purpose and transaction, not to unlimited users, and no contract is needed.
- ANo duty exists because only the company and its shareholders are owed a duty
- BA duty to Veritas is likely to exist because Zetland knew of the specific transaction and the reliance, but liability may be limited to that transactionCorrect
- CA duty exists to all future investors in Kestrel without limitation
- DA duty exists only if Zetland had a written contract with Veritas
Explanation
Where the auditor knows the statements will be passed to an identified party for a specific transaction and that party will rely on them, a duty can arise (proximity and assumption of responsibility). The scope is limited to the known purpose. Option C is wrong as the courts reject indeterminate liability, and a contract is not needed for negligence.
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