Hull LLP is a firm of chartered accountants which has audited Riding plc since 2010. Ridingplc is an oil refining company with annual turnover of £2bn. and net profits of £350m.In January 2019, during the audit of the financial statements for the year ended December 31, 2018, the audit team discovered that contract documentation for a number of purchase orders for crude oil from one supplier, Caistor, was missing. The total value of the missing contracts came to £5m.The matter was raised with the purchasing director, John Scotter, who had to approve all purchase contracts prior to payment. Scotter initially dismissed it on the grounds that it was immaterial, the total cost of oil purchases was in excess of £1bn.When pressed by the audit manager, he gave assurances that these were valid transactions made with reputable suppliers.However, he promised that he would instruct staff to find the missing documents. The missing documents were never found and this was one of the outstanding matters discussed at a meeting between the audit team and the audit partner, RajLace by, in February 2019. Lace by raised the matter with the finance director, Bernard Tetney, at a meeting in May prior to the signing of the auditors’ report. Tetney said that they had more important things to worry about; he assured Lace by that he had no doubts about the transactions but he promised to tighten up controls. Laceby accepted these assurances.He had worked under Tetney when the latter was a partner in HullLLP. Tetney resigned from Hullin 2017before joining Riding. During the next audit early in 2020, the auditors discovered that the system had not changed since their audit last year.Again documents supporting purchase contracts with the supplier, Caistor, could not be found.This time the auditors extended their testing and discovered more unsupported transactions totalling more than £20m.The audit manager quizzed Scotter who became increasingly agitated.Eventually he admitted to having a close working knowledge of Caistor since he was a director of that company too.He begged the audit manager not to tell the other board members of Riding.The audit manager told him that he would have to report it to the audit partner who would almost certainly want to report it immediately either to the board or to the audit committee.The next day Scotter failed to show up for work and could not be contacted on his home phone or on his mobile.That same day, Tetney ordered a detailed investigation.This investigation eventually discovered that Caistor was a fictitious company set up by Scotter in order to defraud Riding.Caistor had invoiced Riding for supplies of oil which had never been delivered. Riding had paid £45m over 5 years for these non–existent supplies.
Required:
a)Advise the partners of HullLLP on their likely legal position, if Riding plc were to sue them for negligence in the conduct of the audit.You should cite examples of case and/or statute law when appropriate.(15 marks)
b)Outline the steps prudent auditors take to reduce the risk of claims for negligence.
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