Chapter 2 (PG)

The CLERP 9 reforms now provide for limitation of auditor’s liability through:  
 

•  a statutory cap
• proportionate liability. 
•  incorporation
• All of the given answers are correct.

 A claim for a breach of duty of care might arise against an auditor if:  
 

• an existing shareholder suffered losses because he increased his investment in the company based on figures in the audited financial report.
• a bank made a loss due to a loan made to the company based on figures in an audited financial report commissioned by the bank.
• a new investor suffered losses because she purchased shares in the company based on figures in the annual audited financial report.
• a finance company made a loss due to a loan made to the entity based on figures in an audited financial report commissioned by the entity

Privity letters are issued by auditors to:  
 

• limit the auditor’s liability to a specified amount.
•  disclaim any liability
• establish proximity and foreseeability.
• None of the given answers are correct. 

Cases that have allowed the auditor to use the defence of contributory negligence include:  
 

• Kingston Cotton Mill
• Pacific Acceptance.
• AWA
• None of the given answers are correct.

In the Caparo case, the court held that the auditor owes a duty of care to:  
 

•  all users of the published financial report. 
• only those parties specified in the engagement letter.
• the shareholders as a body, but not individual shareholders or third parties.
•  all shareholders, but not third parties.

To which of the following parties does the auditor owe a duty of care under contract?  
 

• The company itself.
• The board of directors.
• Shareholders as individuals.
• Potential investors

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:  
 

• enable the audit firm to attest to the reliability of the client.
•  satisfy the audit firm’s duty to the public concerning the acceptance of new clients.
•  minimise the likelihood of association with clients whose management lacks integrity
• anticipate before performing any fieldwork whether an unmodified opinion can be expressed.

A firm of independent auditors must establish and follow explicit quality control policies and procedures because these standards:  
 

• are necessary to meet increasing requirements of auditors’ liability insurers. 
• give reasonable assurance that the firm as a whole will conform to the auditing standards.
•  include formal filing of records of such policies and procedures. 
• are required by the Australian Securities and Investments Commission for auditors of all entities.

Who is responsible for assessing whether company auditors meet the required competency standards for registration?  
 

• Auditing and Assurance Standards Board. 
• Australian Securities and Investments Commission
• Companies Auditors and Liquidators Disciplinary Board
• Financial Reporting Council.

The types of actions by members of accounting bodies that may result in disciplinary action being taken by the member’s accounting body include:  
 

•  if the member is found guilty of a fraud
• if the member practises while bankrupt or insolvent.
• if the member continues practising despite being declared of unsound mind. 
• All of the given answers are correct.