National Fertiliser Distributors Ltd is a broad-based chemical warehousing and wholesaling company. It is reported to be carrying a very high level of inventory in its audited balance sheet at the time a successful takeover offer is made by Cornerd Holdings Ltd. Two months after the takeover, it is discovered that those inventories National Fertiliser does hold are considerably overvalued, and that they don't in fact possess the quantity of inventory claimed at the time of the audit. In the court action subsequently filed by Cornerd against National's auditors, the following matters are established in evidence.

The auditors didn't attend all stocktakes at year-end. They were present at those for the Sydney-based operations of the company only. However, 50% of the company's inventory is purportedly held at its new Bathurst facility, and it is this inventory that doesn't in fact exist. The Sydney-based inventory is determined to have been overvalued by approximately 35%. Although the auditors correctly verified the quantity of Sydney stock, they accepted management's valuation, which didn't take account of considerable obsolescence. It is also raised in evidence that the auditors were subjected to considerable pressure by National Fertiliser's management to complete the audit within one month of the balance date. The auditors had held this audit for the past six years and there was no evidence of any previous misstatements of the value of inventory. Cornerd asserted that they had relied on the audited financial statements, as supplied to them by National Fertiliser, in making their takeover offer. There is no evidence that the auditors were aware of this intended use of the accounts.

REQUIRED

Answer the following questions, providing your reasons for any conclusions stated.

a. What is the probable extent of the auditors' liability in this case?

b. What possible defence(s) might the auditors employ?