Western Ltd purchased the assets of Green Ltd. The financial report of Green Ltd was audited by Donaghue Partners, registered company auditors. While performing the audit, Donaghue Partners discovered that Green’s accounts clerk had embezzled £500.

Donaghue Partners also had some evidence of other embezzlements by the book-keeper.

However, the auditor decided that the £500 was not material, and that the other suspected embezzlements did not require further investigation.

Donaghue Partners did not discuss the matter with Green’s management. Unknown to the auditor, the accounts clerk had, in fact, embezzled large sums of cash from Green Ltd.

In addition, the debtors were significantly overstated. Donaghue Partners did not detect the overstatement because of its inadvertent failure to follow its audit programme.

Despite the foregoing, Donaghue Partners issued an unqualified opinion on Green’s financial statements and furnished a copy of the audited financial statements to Western Ltd. Unknown to the auditor, Western Ltd required financing to purchase Green’s assets and gave a copy of Green’s audited financial statements to City Bank to obtain approval of the loan.

Based on Green’s.audited financial statements, City Bank loaned £600,000. Western Ltd paid Green Ltd £750,000 to purchase its assets. Within six months, Western Ltd began experiencing financial difficulties and later defaulted on the City Bank loan. City Bank commenced legal action against Donaghue Partners citing negligence on the part of the auditor for its failure to discover the fraud, and the overstatement of debtors.

Required

Will City Bank succeed in its action against Donaghue Partners? Explain.