Deck 21: The Auditor and Liability Under the Law

Question 1

Which of the following statements is most correct? ?

A) Failing to disclose information can be an offence under the Fraud Act 2006.
B) The Fraud Act 2006 replaced the Theft Act of 1968.
C) There is no specific offence in UK Law related to falsifying accounting records.
D) The Companies Act 2006 provides for imprisonment of an auditor who knowingly allows an audit report to be issued that is misleading or false.

Answer 1

Failing to disclose information can be an offence under the Fraud Act 2006.

Question 2

Auditors may be sued for negligence under civil law if their standard of work is below that which is expected. A key element that needs to be proved in an action of negligence is:

A) the existence of a contract.
B) intention to act negligently.
C) prior knowledge of the cause of the harm.
D) that the auditor owed a duty of care to the plaintiff.

Answer 2

that the auditor owed a duty of care to the plaintiff.

Question 3

The Caparo Industries case was one of the defining cases regarding auditor liability in the 1980s. The case went as far as the House of Lords. What did the Lords conclude the primary purpose of an annual financial statement was? ?

A) To enable potential investors to decide whether or not to invest in the company.
B) To enable those with a proprietorial interest to exercise their rights.
C) To provide information to a wide range of stakeholders to allow them to make decisions about the allocation of their scarce resources.
D) To support management decision making.

Answer 3

To enable those with a proprietorial interest to exercise their rights.

Question 4

In the case of ADT Ltd vs BDO Binder Hamlyn (1996) where Binder Hamlin was found negligent and ordered to pay £105 million in damages (though the case was ultimately settled for £50 million), what specific action by the auditor was found to make them liable?

A) The auditor signed an unmodified audit opinion.
B) The auditor became aware of misstatements in the financial statements but failed to withdraw their opinion.
C) The auditor facilitated the takeover agreement.
D) The auditor, in a meeting with ADT directors, verbally confirmed that the financial statements provided a true and fair view.

Question 5

Is compliance with the auditing standards a complete defence against auditor negligence? ?

A) Yes, the courts have determined that failure to comply with the standards is a necessary precondition for a negligence action to be successful.
B) No, the courts could determine that public interest could require an auditor to go beyond the requirements of the auditing standards.
C) Yes, legislation contains "safe harbour" provisions (protections) for auditors that comply with the auditing standards.
D) No, the auditing standards are not recognized at law.

Question 6

Since the 1989 Companies Act accounting firms have been able to form limited liability companies. Few large firms have taken this option to protect partners. Which of the following is NOT given as a reason for this?

A) Partners would lose the ability to control the firm.
B) Incorporation could give rise to adverse tax consequences.
C) Companies are required to prepare financial statements and disclose certain information.
D) None of the above, they are all reasons given for firms not forming limited liability companies.