$5\mathrm{.}27$ Liability to third parties, privity letters

You have been the auditor of SHF Ltd for several years. The auditor's report for the year ended $30$ June $2009$ was unqualified. In August $2010,$ SHF obtained a large loan from a finance company, LRB Ltd$,$ to provide additional working capital. The company experienced severe trading problems and was placed in receivership in May $2011.$

LRB is taking action against your firm based on the audit of the $30$ June $2009$ accounts. It claims that the cause of SHF$\text{'}$s failure related to both the inadequate allowance for doubtful debts and a fall in the value of inventories on hand, and that these problems were apparent earlier than June $2009,$ but had not been adequately dealt with in the financial statements. LRB also claims that it would not have given the loan to SHF had those accounts been qualified.

Required

$($a$)$ Outline your defence against the action taken by LRB$.$ Provide specific case references to support your answer.

$($b$)$ Explain whether you would change your answer to part $($a$)$ if LRB had written to your firm telling you that it intended to make a loan to SHF and was relying on the audited financial statements to assist it in making its decision. $17$