5) Four Months after the audit firm of Dewey, Cheatem, & Howe issued an Unqualif

Question

5) Four Months after the audit firm of Dewey, Cheatem, & Howe issued an Unqualified
opinion that the F/S of Crook Puppy Investments (CPI) Ltd (an investment form
registered with ASIC) were True and Fair, the Australian Federal Police (AFP) raided
the offices of CPI, found that CPI had been engaged in money laundering for two Bikie
Gangs, seized CPI’s resources as the proceeds of crime, and shut the firm down. Shortly
there-after, CPI declared bankruptcy and was able to payout only 20¢ on the dollar of
creditor claims. The creditors of CPI are planning to sue Dewey, Cheatem, & Howe.
Required:
a) Should the creditors sue under contract law or tort law? (Explain).
b) What is a privity letter and how would your answer to question 5a change if
Dewey, Cheatem, & Howe had issued one of the major creditors a privity letter?
c) What matters must the creditors prove before their claim against Dewey, Cheatem,
& Howe can succeed?

Explanation / Answer

Solution:

5) a) Under the contract law if any agreement is breach between the contract parties, in that case the affected contract parties can sue against the other contract party. In the instant case the creditors of CPI want to sue the auditor. If the auditor not perform his duty properly and due diligence is not complying by the auditor only in that case creditors can sue against the auditor.

b) Privity letter is the third party confirmation letter obtain by the auditors from the third party. The matters on which auditors require the expert opinion and bound to rely on the external parties, in that case the auditor should obtain privity letter. If the auditor obtains the same from the third party, then the auditor is not guilty and the creditors cannot sue against the auditor.

c) Before the claim of the creditors against the auditor they must prove that auditor is not performing its duty with proper due diligence and the respective matter is known by the auditor and they did not consider the same and suppress the fact in the audit report and issue unqualified report to state that the function of the financial statement is true and fair.

References:

Posner, R. A. (2014). Economic analysis of law. Wolters Kluwer Law & Business.

Sangwan, S. (2016). Real Estate: The 5 Must-Haves for Consultants Seeking Reliance Letters from Other Consultants.

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