You are carrying out the audit of ACB Computers limited for the year ended 31 December 2003. The company assembles microcomputers purchased from the Far East and sells them to retailers, and to individuals and other businesses. In the current year, there has been a recession and strong competition, which has resulted in a fall in sales and the profits. This has led to a trading loss and the company is experiencing going concern problems. Required; c) State the parties who may successfully sue you as auditor for negligence, and consider the arguments you could include in your defense when: The financial statements of ACB Computers Limited for the year ended 31 December 2003 do not mention any going concern problems and your audit report on these financial statements was unqualified and The company fails on 15 February 2004

Since ACB Computers Limited has failed within a year and the auditor had given an unqualified report, certain parties may be able to successfully sue him for negligence. The decision in the Caparo case is that only the company and the shareholders as a body can bring a claim for negligence against the auditor. It is possible that the court will refer to the ISA that indicates that the audit report should have mentioned the going concern problems. As the auditor did not mention them, the claim for negligence could be successful. In the situation, the going concern problems were apparent during the audit and this reduces the strength of the auditor‘s defense. There are a variety of arguments the auditor could make in defense against a negligence claim, but these depend on the circumstances. If ACB failure was caused by a sudden event or one that occurred after the audit report was signed and was not expected to occur at the time the audit report was signed, then the auditor may have a good defense against the negligence claim. These could include a legal claim against ACB, a substantial loss on a contract entered into after 31 December 2003. If the failure was not foreseen as at 31 December 2003 then the auditor can avoid a claim for damages.

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