You are a partner in an auditing firm. You have just received notification that one of your audit clients is suing your firm for negligence. It has discovered that its sales ledger clerk has been misappropriating funds received from customers for the past year. Although it was a substantial amount of money, it was not material compared with total cash receipts.

The audit client has evidence that your firm found a discrepancy during the audit in testing accounts receivable. It also knows that your firm brought it to the attention of the sales ledger clerk.

You decide to locate the audit file to review what the audit senior recorded in his working papers. You note that the audit senior felt that, in his opinion, a satisfactory explanation had been given by the sales ledger clerk, and that no further action was deemed necessary. Your client believes your firm should have reported the matter to a more senior person within the organisation and followed it up more thoroughly.

Required

(a) Prepare a defence based on the current obligations for detection and reporting of irregularities.

(b) Do you think you will win the case?