(i) According to Section 174(2), auditor is responsible to report defects and irregularities in accounts and the company’s accounting and other records relating to accounts in general meeting. An auditor has the obligation under law to perform his duties with the skill and care required under certain circumstances. The auditors always owes of care to the client. The client has the right to bring legal action against the auditor either for breach of contract or negligence if the duty of care is not exercised. In this case, the junior team member has exercised due care when discovering the major internal control weakness and highlighted it to the team leader. However, the audit team leader did not discussed the issue with the management, so he has not performed due care in auditing Prospek Teguh Sdn Bhd.
(ii) If a lawsuit is initiated by Oct Bank against Nadyah & Sarinah, the auditor would probably be liable. This is because, as the auditor, they were responsible in reporting any weaknesses in internal control to the management. In this case, the weakness was highlighted but the audit team leader included it under non-reporting points whereas in fact, the weakness is major and should be reported. However, apportionment of liability may be possible between the auditor and the Prospek Teguh Sdn Bhd if Nadyah & Sarinah is able to prove the existence of contributory negligence. The auditor may be able to argue that the Prospek Teguh Sdn Bhd is partly responsible for its own loss or the loss was not due entirely to the auditor’s negligence. In this case, the management of Prospek Teguh Sdn Bhd did not implement a proper internal control regarding the procedures for the issuance of the company’s cheques.
According to the Australian case of AWA Limited v. Deloitte Haskins & Sells (1992), the court held that the auditor
