Tickett & Run LLP is a city firm of Chartered Certified Accountants. The firm’s accounts are produced by the administration partner but are subject to audit by Blanket, Mange, another firm of Chartered Certified Accountants. In June 2X10, a partner in Tickett & Run who was suffering from overwork failed to realize that an enormous error had occurred in the preparation and audit of the financial statements of International Maize Ltd (‘IM’) for the year ended 31.5.2X10. Quantities of maize in transit had been inadvertently included in the company’s inventories in both the producing country and the receiving country. The company had been acquired by Universal Porage Inc. Which has now discovered the mistake. They have given notice that they intend to bring an action to recover damages from Tickett & Run on the grounds that they relied on the audited accounts for the year ending 31.5.2X10 and that they would not have purchased IM had they known of the error. The stock of IM was overstated by £2.4 million as a consequence of the error. The profit of IM was reported as £4.3 million and UP paid £21 million cash for IM. Tickett & Run carry professional indemnity insurance but only in the sum of £1 million due to an administrative error. The partners of Tickett & Run dislike each other and rely heavily on Blanket, Mange. No one at Tickett & Run has informed Blanket, Mange of the pending legal action.

Questions:-

1. What auditing procedures might allow Blanket, Mange to discover the existence of the action?
2. How might the amount of the ultimate award and costs be determined by Blanket, Mange?
3. What other hidden liabilities might Tickett & Run have at their year end — 31.12.2X10?