1. In some countries, a capping system has been introduced to deal with auditor liability. Discuss the characteristics of this system. What are the advantages and disadvantages of such a system from the viewpoint of investors and auditors?
2. The loan decision-making process involves an actual or potential conflict of interest between the commercial bank and the company’s management. The independent auditor’s role has been emphasized in the risk assessment of loan decisions. Assume that an auditor issued an opinion on the financial statements of company A, which contained two material misstatements. The company’s management has failed to disclose that a significant portion of the accounts receivable probably could not be collected. Moreover, the company’s inventory has been considerably overstated. In both cases, the auditors did not apply due diligence to disclose the material misstatements to users of financial statements. The company subsequently declared bankruptcy. What are the auditor’s responsibilities towards a commercial bank that lent money to company A on the basis of the financial statements? Under what concepts and to what extent might the bank recover damages from the auditor?