Reference no: EM132919109

The public accounting firm, Big and Small was expanding rapidly. Consequently, it hired several new graduates, including a man called Little. The partners became dissatisfied with Little's work and warned him that he would be discharged unless his output increased significantly. Little decided that in order to avoid being fired, he would reduce or omit some of the standard auditing procedures. One of the firm's clients, Newbody Ltd was in serious financial difficulty and had adjusted several accounts to appear financially sound. When Little was examining the accounts including the ones manipulated, he doctored his work papers to support the successful completion of the procedures assigned to him. The firm rendered an unqualified opinion on Newbody's accounts even though they were grossly misstated. Several financial institutions and creditors extended credit and loans to Newbody after relying on the financial statements. The company failed and the liquidator questioned the competence of the auditors.

Required:

Problem a) Analyse Big and Small's probable legal position and potential liability to each of the following parties: liquidator, creditors, company, and shareholders. Carefully note any relevant cases and precedents.

Problem b) Consider the best possible defence for the auditors, including contributory negligence.