(a) Yes
i) As a result of developments in case law Donahue V Stephenson in 1932 to Hedley Byrne & Co. Ltd V Heller & Partners Ltd in 1963, auditors may be held to owe a duty of care to third parties under certain circumstances. A third party who suffers a loss through reliance on misleading audited accounts may bring an action for damages against the auditor in tort.
ii) Such a requirement would make auditors more vigilant in their work because of potential liabilities. iii) Creates an avenue to compensate other users for lose occasioned by auditors negligence. iv) Protection of public interests at large from fraudulent auditors. Woolf J; in his judgment in the case of Jeb Fasteners Ltd V Mark Bloom & Co. identified the conditions to be met in actions under tort as follows :- 1. Foreseeability, by the dependent, of the plaintiff?s. 2. Reliance by the plaintiff on the accounts 3. Negligence by the defendant in preparing, (auditing) the accounts. 4. Causation of loss suffered by the plaintiff in consequence of the negligence. 5. Quantum of the loss suffered by the plaintiff arising out of the defendants negligence. (b) No This is because every audit is different and what may be seen to be reasonable care and skill in one audit may not be for a different audit. Thus to codify is to issue uniform exceptions of reasonable care and skill. This would be wrong, as the circumstances of every audit are different. Thus, whatever is reasonable skill and care should be determined by an individual auditor by exercising his judgment depending on the circumstances of his audit.
(c) The auditor should be unwilling to take full responsibility for the detection of fraud during the annual audit as fraud is committed with the intention to conceal it. Thus, there is a great chance that even a well planned and properly carried out audit will be unable to detect fraud. This is especially if the fraud has been perpetrated by the management of the entity. In addition, an auditor carries out his work during a very short duration of the financial period. It would be unreasonable to expect him to review everything that took place during the year, a role that could be better played by management. d)The expectations gap should be reduced by the auditing profession since it is the profession, which suffers as a result of the gap. This is because, the users of the auditors report do not understand it and hence claims for negligence may be raised against the auditor. A more detailed look at expectations gap follows:-
The Expectation Gap
There has been considerable discussion in recent years on the role of the auditor, and the „Expectation Gap?. In general terms this can be described as the gap that exists between what the public, especially users of financial statements, believe auditors do (or ought to do) and what the auditors actually do. Such a gap usually surfaces on the unexpected failure of a company. Various elements of this gap have been identified
a)A Standard gap
Where the public perceive auditing standards as different from what they actually are.
b) A performance gap
Where auditors perform below existing standards.
c)A liability Where the public does not know to whom an audit is legally responsible.
(a) Understanding financial statements and the audit report False or unrealistic expectations in users of financial statements are frequent. They may not appreciate the conventions on which accounts are prepared, the inevitable degree of estimation and judgment involved or the test nature of audit work. Communication with these users to improve their understanding could be improved. The most significant work on this area has been ISA700 Auditors? Reports on Financial Statements, which requires the auditor?s report to define the responsibilities of the auditor and the directors in relation to the financial statements.
b)Fraud
When questioned, a high proportion of the public believes that the auditor has a responsibility to detect fraud of all kinds, or that he should actively search for fraud. However, deep-seated fraud with wide collusion maybe virtually impossible to identify, given the limitations of audit techniques. The auditor may not reasonably be expected to have discovered a particular fraud in particular circumstances. Once again, the profession should attempt to explain these limitations to the users of accounts, so that they are aware of the auditor?s responsibility is to have only a „reasonable expectation? of detecting material fraud. Alternatively the auditor could be required to limit the opportunity for fraud in the first place. Requirement could be set for companies and their auditors to review the effectiveness of controls to prevent material fraud, and to report material deficiencies.
(c) Control of the auditing profession At a national level, legislation to control auditors varies. At an international level IFA produces ISA?S and ethical guidance which influences good practice. However these pronouncements are not legally enforceable. Audit failures are sometimes due to poor performance. Education (keeping up to date) should remedy this. Legal action and disciplinary proceedings serve as a warning.
johnson mwenjera answered the question on August 13, 2018 at 12:52
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