It is a statutory requirement for the financial statements of every limited company to be audited at least once a year.

The New Companies Ordinance (“the new CO”) requires auditors to have the following duties and responsibilities:

>Conduct investigations to enable them to form an opinion on the true and fair view of the financial statements.

>Obtain the necessary information and explanations for audit purposes.

>Attend general meetings on business which concerns them as auditors or former auditors.

>Prepare written representations on matters concerning their resignation and removal that members should note.

To ensure the auditors can discharge their responsibilities properly and to enable them to form an audit opinion:

>The new CO stipulates the rights of auditor to

. access information for audit purposes.

. seek necessary information and explanations and perform appropriate investigations.

. to make representation upon removal and resignation.

>The Professional Accountants Ordinance set out the auditors’ required qualifications, which emphasize the independence and competencies required for carrying out auditing services.

Auditors’ liability to the client or to a third party, usually involves

>breach of the contract with client (not applicable to third party liability).

>fraud-Auditors will be liable for fraud when he or she acted with the intention to deceive the third party by making false representation.

>Negligence-Claims for negligence generally arise when an auditor has failed to perform an audit at a reasonable standard of care specified in the Code, HKSAs and terms of engagement. To establish an auditor’s liability for negligence, the plaintiff must prove the following:

. The auditor had the duty of care to the plaintiff.

. The auditor failed to act in accordance with that duty.

. The plaintiff suffered actual loss.

. The plaintiff’s loss is due to the auditor’s negligence in carrying out his duty.

To protect from or to minimize legal liabilities; the auditors should possess the following:

>Defenses against suits of negligence using one or a combination of: lack of duty; non-negligence performance; contributory negligence and absence of causal connection.

>Quality control at firm/engagement level, including: leadership responsibility for audit quality; managing client acceptance or continuing; compliance with ethical requirements; managing human resources; review of engagement performance; monitoring and documentation.

>Actions to be taken by the accounting profession to have better protection against legal liabilities, including lobbying for change of law; insurance; comply with HKSAs and Code of Ethics for Professional Accountants and users education.