After performing the audit process, ABC, a local audit firm expresses an unmodified audit opinion on the financial statements of Allied Well Ltd. for the year ended 31 December 2019 and there were no matters in the auditor’s report to which the auditor drew attention to. On 30 November 2020, Allied Well filed for bankruptcy. Star Bank is a major creditor of Allied Well. Star Bank has alleged that the audit firm, ABC, failed to warn them of several major irregularities and fraud which have come to light since ABC issued their auditor’s report on the 31 December 2019 financial statements. Star Bank has stated that it has relied on ABC’s unmodified auditor’s report and made several substantial loans to the company. When Allied Well declared bankruptcy, the company defaulted on the terms of these loans owing Star Bank a significant amount of arrears. ABC have argued that Star Bank had already made several loans to the company prior to the audit of the financial statements for the year ended 31 December 2019 and would have continued to advance loans to the company based on their covenant agreements regardless of the auditor’s report or the opinion contained therein. Required: a. Identify and describe the relationship between ABC and Star Bank, b. Specify what duty ABC should hold for Star Bank and why. c. Propose your judgment on whether ABC is liable for Star Bank’s losses. Give your reasoning
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