a. The possible Legal positions of the firm are as follows:

i. The audit firm has statutory responsibilities to report whether financial statements shows a ‟true and fair view‟ or „present fairly‟ the financial position. If the firm is shown to be negligent in this process, they could be subject to various types of legal action- civil, criminal;

ii. In the specific case of Globamedia, the problems relate to investment from reserves and the collapse in share price resulting from the “rumor” of a lack of reserve and lack of financial viability. The suspension of the company’s shares allows times to investigate the true position and deal with facts rather than rumour;

iii. During the audit, the firm should have considered the appropriateness of the going concern basis of accounting and should have obtained sufficient and appropriate audit evidence to conclude that assets are not materially overstated. The going concern review should have been carried out with a due level of skill, care and diligence, and with regards to professional standards;

iv. If it can demonstrate that the audit was performed in accordance with professional standards, then it will be difficult to prove negligence. However, if there are doubts in respect of the company as a going concern then it should be fully pursued to establish the facts; v. The background information does not identify the source of the possible legal action. There is a possibility of „liability in tort‟, under which a third party could sue the firm for damages; and

vi. The third party would have to prove that the auditor owes a duty of care to the third party, that appropriate standards of care have been breached, and that the third part has suffered loss as a direct result of this breach of standards.

b. Requirements for due care include:

i. When carrying out their duties for a client, the auditors must exercise reasonable care and skill;

ii. IFAC and ICAN’s code of ethics require that members should carry out their professional work with professional competence and due care and with proper regard for the technical and professional standards expected of them as members;

iii. Professional competence includes both technical qualifications and the ability to apply that knowledge and experience;

iv. Due care requires the auditor to observe the profession’s standards of fieldwork and to keep up to date with relevant technical developments and professional and general economic pronouncements;

v. The auditor should plan and perform the audit with professional scepticism, recognising that circumstances may exist that cause the financial statements to be materially misstated;

vi. Supervising of audit work, including a review of working papers;

vii. Monitoring of quality control procedure;

viii. Final reviewing of the financial statements; and

ix. Taking professional indemnity insurance to provide an insurance protection should the company be faced with successful legal action.

c. Steps and procedures that the firm could have taken to prevent such a situation from occurring include:

i. The firm should have carried out a risk assessment of the client;

ii. The firm should have obtained an understanding of the entity and its environment;

iii. The firm should have assessed the risks of material misstatement at the financial statement and assertion levels;

iv. The firm should have designed and implemented responses to the risks of material misstatement;

v. The firm should have performed substantive procedures;

vi. The firm should have evaluated the audit evidence obtained;

vii. The firm should have formed an opinion and reported the extent to which the financial statements are affected by any misstatements;

viii. The firm should have communicated with those charged with governance;

ix. The firm should have documented the audit; and

x. The firm should have evaluated the firm’s system of quality control.