Topic 4:

LIABILITY OF AUDITORS

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At the end of this topic, students should be able to:

 Discuss liability of auditor under common law and

statutory law.
 Summarize several cases under common law
 Explain the quality control to minimize the auditor’s
liability

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 INTRODUCTION

• Auditors have duty to provide reasonable

care while doing their work.
• If they do not, then they would be liable for
negligence of breach of contract by their client.
They could also be held liable under common
law to third parties

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 INCREASE IN LAWSUIT

• Growing awareness of responsibilities of

auditors
• Alternative accounting principles and lack
of clear cut criteria for auditor to evaluate
whether the proper alternative was selected

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 LIABILITY OF AUDITOR
Auditors can be held liable under 2 classes
of law:
 Common law
 Statutory law

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 LIABILITY OF AUDITOR (contd.)

 COMMON LAW
i. Case law developed over time.
ii. Liability concept are developed through
court decision
iii. Legal opinions are issued.
iv. Legal principles become precedent for
similar cases in future.

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 LIABILITY OF AUDITOR (contd.)

 STATUTORY LAW
i. Written law enacted by the legislative
arm of government.
ii. Law that is developed based on federal
securities law.
iii. Establishes certain courses of conduct
to be adhered to.

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 COMMON LAW (contd.)

Auditor’s liability to clients and 3rd parties

under common law:
 Breach of Contract – liability to clients
 Negligence – liability to clients and 3rd parties

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 COMMON LAW –
breach of contract (contd.)
• liability to clients
• Failure to carry out contractual arrangements
with client, liable for breach of contract and/or
negligence.
• If the client breaches obligations under the
engagement letter, auditor is excused from his
contractual obligations.

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COMMON LAW - Negligence (contd.)
• liability to clients and 3rd parties
• “some act or omission which occurs because
the person concerned has failed to exercise
that degree of professional care and skill,
appropriate to the circumstances of the case,
which is expected of accountant and auditors.”

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 COMMON LAW - Negligence (contd.)
• In an action for negligence against an auditor, the
plaintiff must prove:
i. The auditor owed a duty of care to the plaintiff.
ii. There is failure to act in accordance with that duty of
care; a breach of duty of care.
iii. There is causal relationship or connection between
the auditor’s negligence and the plaintiff’s damage.
iv. The plaintiff suffered actual loss or damage

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How auditor can maintain a
reasonable standard of
professional care?

Forensic Accounting Module – Certified Financial Investigator Program – 12

Bank Negara Malaysia:
 Quality Control (QC)

• Definition – a system that relates to the concepts of

professional competence and
• The meeting of professional standards (technical and
ethical) in providing professional services, so that
audit failures and audit risks are reduced to an
acceptably low level.

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