Reference no: EM132639822

Question - Sonny Manufacturing ltd sought a million loan from bank of Australia. The bank insisted that audited financial statements be submitted before it would extend the credit. Sonny agreed to work it and also agreed to pay the audit fee. An audit was performed by an independent qualified accountant who submitted his report to sonny to be used solely for the purpose of loan negotiation with the bank. The bank, after reviewing the audited financial statements, decided not to extend the loan to sonny. The bank had been using some ratios from the financial statements and decided they were too low. Sonny used the financial statements to obtain a loan from another financial institution. However, it was subsequently discovered that the auditor had failed to detect significant embezzlement by a senior manager at Sonny.

Required -

What are the liabilities of the auditor?

And to whom is the auditor liable to.

If the auditor did cover the embezzlement, and noted it in the notes to the financial statements, is he still liable and to whom.

What factors would appropriately be considered before the auditor's liability is confirmed.