An auditor signed an audit report of Victim, a limited liability company, without modification, but subsequently admitted that he had not carried out tests on the substantial inventory balances, which had been included at selling price rather than cost. The group was subsequently acquired by Competitor Group who claimed to have relied upon the fraudulently prepared accounts presented to them in negotiations before agreeing to make a bid for the shares on the strength of the published net asset values.

On the basis of the above, a legal action has been brought by Competitor Group against the auditor for negligence. A valid defence against such an action would be to show that: