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- 6 Marks
Question
Capare Industries Ltd, which already held shares in a company known as Logotex Co., later made a takeover bid on the strength of its accounts prepared by Dickman Ltd., a firm of auditors. Capare Industries Ltd realized that the accounts were inaccurate in that they showed a pre-tax profit of GH¢1.3 million when in actual fact there had been a loss of GH¢400,000. It was the case of Capare Industries Ltd that if they had known the true situation, they would not have made a bid at the price they did or may not have made a bid at all. They argued that they were owed a duty of care by the auditors as new investors and as existing shareholders who in reliance on the accounts had bought more shares.
Required:
Explain whether Capare Ltd would be justified in taking action against the firm of auditors.
Answer
Capare Industries Ltd would be justified in taking action against the firm of auditors for the following reasons:
- Duty of Care: The firm of auditors has a duty to provide an independent and professional inquiry into the financial matters of a company to ascertain whether the financial records generated by management and the financial statements prepared by the directors disclose the true state of affairs of the company.
- Primary Audience: Every audit report of a company has the membership of the company as its primary audience, and therefore, the auditors owe a duty of care to the members of the company, which includes Capare Industries Ltd.
- Reliance on Audit Report: Capare Industries Ltd, being a shareholder in Logotex Co. Ltd, relied on the audit report prepared by Dickman Ltd. to make a takeover bid. The inaccuracies in the audit report directly influenced their decision.
- Professional Negligence: As professionals, the auditors are required to maintain high standards in their financial investigations. The erroneous financial report prepared by Dickman Ltd., which Capare Industries Ltd relied on, constitutes a breach of this duty of care, amounting to professional negligence.
- Legal Action: Capare Industries Ltd can take legal action against the firm of auditors for damages caused by their reliance on the inaccurate financial statements, which resulted in financial loss.
(6 marks)
- Tags: Auditors, Duty of Care, Ghana, Legal Liability, Professional Negligence
- Level: Level 1
- Topic: Accounts and audit
- Series: NOV 2016
- Uploader: Dotse