In a management letter to Cline Wholesale Company Ltd the company's auditor, John Schwartz, informed management of its deficiencies in the control of inventory. He elaborated on how the deficiencies could result in a significant misstatement of inventory by the failure to recognise the existence of obsolete items. In addition, Schwartz made specific recommendations on how to improve the internal control structure and save clerical time by installing a computer system for the company's perpetual records. Management accepted the recommendations and installed the system under Schwartz's direction.

For several months the system worked beautifully, but unforeseen problems developed when a master file was erased. The cost of reproducing and processing the inventory records to correct the misstatement was significant, and management decided to scrap the entire project. The company sued Schwartz for failure to use adequate professional judgment in making the recommendations.

REQUIRED

a. What is Schwartz's legal and professional responsibility in the issuance of management letters?

b. Discuss the main considerations that will determine whether he is liable in this situation.