You have been the auditor of Data Ltd for two years. Your auditor's report for Data for the year ended 30
June 2018 was unmodified, indicating that in your opinion the financial report gave a true and fair view.
In August 2018, Data obtained a large loan from Better Bank Ltd, to provide additional working capital.
Subsequently Data suffered severe trading difficulties and was placed into liquidation in late December
2018, with insufficient funds to repay the loan to Better Bank. Required Outline a defence for your audit
firm to any legal action taken by Better Bank to recover its loss.
In a situation where Better Bank is seeking to recover its loss from the auditor's firm, the auditor can
potentially present a defense based on several key points:
Limited Scope: The audit report for the year ended 30 June 2018 was unmodified, indicating that the
financial report was accurate as of that date. Auditors do not provide assurance on a company's ability to
continue as a going concern beyond the reporting period.
Reliance on Management: Auditors rely on the information and representations provided by the
company's management. If Data Ltd's management failed to disclose the severe trading difficulties or any
potential insolvency issues, the auditors may argue that they were misled.
Timeliness of Information: The severe trading difficulties and financial distress may have emerged after
the audit period, making it challenging for auditors to anticipate and address these issues in the 2018
audit.
Legal and Regulatory Framework: The auditors may contend that they conducted the audit in accordance
with the applicable auditing standards and regulations in place at the time. If these standards did not
require a different approach, the defense may argue that the auditors acted in accordance with the
prevailing norms.
Duty to Report: Auditors have a duty to report any identified issues during the audit process. If the
auditors did identify any concerns during the 2018 audit, they might assert that they communicated
those issues to Data Ltd's management and fulfilled their reporting obligations.
Foreseeability: The auditors may argue that the severe financial downturn and insolvency were not
foreseeable at the time of the 2018 audit.
It's essential to consult legal counsel experienced in auditing and corporate law to develop a robust
defense strategy tailored to the specific circumstances of the case and the legal framework in your
jurisdiction. The success of the defense may depend on the strength of the argument and the available
evidence.
