Reference no: EM132979582
Question: Fast Audits is the external auditor of Stokes Ltd, a public company with a 30 June 2020 fiscal year end. Argyle Ltd has been negotiating a take-over deal with the directors of Stokes Ltd and requested a privity letter from Fast Audits for relying on the audited financial statements. Fast Audits sent a privity letter acknowledging Argyle Ltd's reliance on the audited financial statement for the take-over deal. You performed the audit and issued an unmodified audit opinion on 25th September 2020.
Argyle Ltd sealed the take-over deal based on the audited financial statements. In the meantime, another company, Pinnacle Ltd, also bought a large amount of the shares at the price corresponding to the audited financial statements.
After the take-over took effect in October 2020, it was discovered that Stokes Ltd had material off- balance sheet liabilities It was found that the updated accounting standard for the treatment of leases had not been properly applied and that various operating leases had not been properly accounted for or disclosed, which was not discovered by Fast Audits. After the restatement of the financial statements, Argyle Ltd recognized a loss of $2,900,000 in the take-over deal and Pinnacle Ltd lost $123,000 for the shares it had acquired.
Required:
(a) Is Fast Audits liable to Argyle Ltd? Support your answer with appropriate reasons.
(b) Is Fast Audits liable to Pinnacle Ltd? Justify your answer with reference to applicable case law.
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