You are an audit senior and you have just finished the audit of Speedy Spares Ltd — a used car parts company. One month later...

Your audit partner calls you into his office — he is not happy! Speedy Spares has just gone into liquidation. It seems the financial controller was diverting company funds into a Swiss bank account and has left the country to live in Majorca. The lawyers for the creditors of Speedy Spares are taking action against the partner for not performing an appropriate audit. They believe that in the course of a properly conducted audit, such a fraud should have been detected. The fraud was substantial; however, it was not material from the company’s point of view. You explain to the partner that the audit was performed in accordance with all Auditing Standards and nothing was found to arouse suspicion during the audit. The audit took the same amount of time as last year and all appropriate work steps were performed. Your work was reviewed by a manager and the entire file was reviewed by the audit partner.

The audit partner is still concerned. He rings an audit partner in an associated office of your accounting firm and asks her to review the audit file. She agrees and spends a day reviewing the file. After completing her review, she is satisfied that the audit was performed properly.

Required

(a) Has your accounting firm acted with ‘due care’? What do you think will be the court’s decision if the case goes to trial?

(b) Even if the partner is convinced he acted with ‘due care’, why would he possibly offer Speedy Spares a substantial settlement amount?