MAA303 Audit And Assurance - Chapter 2: Ethics, Legal Liability And Client Acceptance

2.31 Auditor liability for misleading accounts

Bumpa Shopping Centres has borrowed heavily in recent years. The pressures of rapid expansion have been felt within its finance department, and the chief financial officer (CFO) has begun to make mistakes. The CFO neglected to reclassify some of its debts from non-current liabilities to current liabilities following default on some terms of the contract with an international banking syndicate, and omitted contingent liabilities from the notes to the accounts. The billion dollar mistakes were not detected by either the directors or the auditors, and the financial report and audit report were published. Following discovery of the mistake, the shares in Bumpa Shopping Centres lost value rapidly and the company was placed into liquidation.

Required
Discuss the auditor’s liability for losses suffered by (a) Bumpa Shopping Centres investors, and (b) other parties.