During an audit of a loan company, the auditor discovered that the recipient of a loan with a principal balance of \(\$ 2,100\) had received only \(\$ 2,000\) when the loan was written. The auditor read the loan agreement and noted that it called for a \(\$ 2,000\) check and \(\$ 100\) in currency to be given to the customer who borrowed the money.

The auditor read other loan agreements and found similar wording in each of them. When the controller was asked about this practice, she replied that this "service" was given to the customers so that they could have immediate access to currency. She thought that the \(\$ 100\) inconsistency was an error and could be corrected easily. The auditor decided to drop the matter.

Early the following year, a class-action lawsuit was brought against the loan company by several customers who discovered that they had received less than the principal amount of the loans. It was discovered that the controller had kept the currency. The company's board of directors notified the auditor that they would take legal action against him because of his failure to inform them of what he had learned about this matter.

Required

a. Could the auditor be held liable for either ordinary negligence or gross negligence in this case?

b. Assume that the auditor chose to include this loan agreement practice in a letter of reportable conditions to the audit committee. Draft such a letter. Include a recommendation of the controls that can be implemented to prevent such an occurrence.