MQ Chartered Accountants (MQ) was the auditor for Wartz Limited (Wartz) for the financial year ending 30 June 2016. In August 2016, Downtown Limited (Downtown) made a successful takeover offer of Wartz Limited based on the unqualified 2016 audit report issued by MQ. Shortly after the takeover, Downtown discovers that the inventory of Wartz had been materially overstated as there were large quantities of inventory that did not exist, were damaged, or unsaleable. It is subsequently revealed that MQ did not attend the stocktake at all locations at which Wartz held its inventory. Downtown is taking legal action against MQ for losses it has incurred in the takeover of Wartz.
a. Do you think MQ will be found liable to Downtown? Why or why not?
b. Do you think that the requirements that need to be met before an auditor may be found liable to a third party are fair? Why?