Auditors may be liable to shareholders and other parties who may have relied on the financial statements upon which the auditors have expressed an opinion. This is because the auditors are generally taken as owing a ―duty of care‖ those parties and they could be liable in the tort of negligence if they failed that duty. Required With reference to the external audit assignment, explain the meaning if the term ―dutyof care‖

You are required to explain the meaning of the term “duty of care” in reference to the external audit assignment

What constitutes duty of care is not defined, however we can derive this from decided cases.
According to case law a duty of care exists where there is a special relationship between the parties. (Re: Hedley Byrne)
When carrying out his work the auditor must exercise care and skill. As stated in Re:London and General Bank (UK case). ― An auditor is not bound to do more than exercise reasonable care and skill in making enquiries. He is not an insurer, he does not guarantee that the books do correctly show the true position of the company‘s affairs, he must be honest, he must not certify that he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true‖
In the absence of suspicious circumstances, the auditor would not be liable for failing to uncover fraud and falsities which could not be discovered by exercise of normal skill an care. This was stated in Re: City Equitable Fire Insurance (UK case).
From these decided cases the duty of care refers to the responsibility that the auditor assumes towards the client and other third parties whenever they undertake an assignment. The auditor should carry out his work to the best quality standards possible to protect the interest of the parties who have appointed him.