An auditor was sued and found guilty of negligence. For each of the following situations, indicate the likelihood the plaintiff would win if the plaintiff is: An investor suing under the 1934 Securities Exchange Act. An investor suing under the 1933 Securities Act.
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An auditor was sued and found guilty of negligence. For each of the following situations, indicate the likelihood the plaintiff would win if the plaintiff is:
- An investor suing under the 1934 Securities Exchange Act.
- An investor suing under the 1933 Securities Act.
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- Analyze each of the following situations below and provide your assessment of the potential resolution of each scenario, including potential liability for the auditor or audit firm involved. Yasmeen CPA is a defendant in a lawsuit alleging that she should be held liable for gross negligence for a fraud involving the valuation of securities included in the financial statements of one of his clients. Yasmeen was uncertain how to establish a correct valuation for the securities and decided to rely on the price estimation supplied by management. A lawsuit has been filed against Elena CPA, charging here with constructive fraud in the audit of Broughton Company’s financial statements. Elena has examined all the audit documentation in his files and reviewed all relevant auditing standards. She is convinced that his audit fully complies with standards of the profession but is uncertain what he should use as his primary defense tactic. Canon Film filed for a bankruptcy in January 2012. A…Individuals who believe they relied on misstated financial statements to make a decision andhave suffered losses as a result will issue an action known as aa. Breach of contract.b. Tort.c. Securities litigation.d. Constructive fraud.Consider section 24 of the Securities Act of 1933 and section 32 of the Securities Exchange Act of 1934 (see Module C). Based on the case information, do you believe that Madoff’s auditor, Friehling, should be facing criminal charges? Why or why not?
- An investor or creditor believes that they have suffered harm due to the unexpected the bankruptcy of a large corporation: Required: Can that investor or creditor sue the auditor of the large corporation under contract law? Explain. If the investor or creditor chooses to sue the auditor of the large corporation under tort law, what must they prove before their claim can succeed? How can the auditor contest a claim of negligence?When investors sue auditors for damages under section 11 of the Securities Act of 1933,they must allege and provea. Scienter on the part of auditors.b. The audited financial statements contained a material misstatement.c. They relied on the materially misstated financial statements.d. Their reliance on the materially misstated financial statements was the direct cause oftheir loss.Section 11(b) of the Securities Act of 1933 provides that individuals can be sued and maybe liable for investors’ losses in connection with a public securities offering under which ofthese circumstances?a. The chairman of the board of directors performed a reasonable investigation of facts inconnection with preparing the section in the registration statement concerning the specification of the use of the proceeds of the offering.b. A consulting engineer performed a reasonable investigation and reported in the registration statement on the feasibility of construction of a roadway to be financed with theoffering proceeds.c. The president of the issuing entity had no reason to doubt the report of the consultingengineer, although the president did not perform a separate reasonable investigation ofher own.d. The officers of the issuing entity were relieved that the independent auditors did notmake an issue about the excessive valuation of inventory held to support construction inprogress
- A group of investors sued Anderson, Olds, and Watershed, CPAs (AOW) for alleged damages suffered when the entity in which they held common stock went bankrupt. To avoidliability under the common law, AOW must demonstrate which of the following?a. The investors actually suffered a loss.b. The investors relied on the financial statements audited by AOW.c. The investors’ loss was a direct result of their reliance on the audited financial statements.d. The audit was conducted in accordance with generally accepted auditing standards andwith due professional care.A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A) The investor has not proven CPA negligence. B) The CPA detected the misstatement after the audit report date. C) The audit work was adequate to support the CPA's opinion. D) The investor did not rely upon the financial statement.In a common law action against an accountant, lack of privity is a viable defense ifthe plaintiff(1) is the client’s creditor who sues the accountant for negligence.(2) can prove the presence of gross negligence that amounts to a reckless disregardfor the truth.(3) is the accountant’s client.(4) bases the action upon fraud.
- What does a third-party user of financial statements have to prove under common law in a suit against an auditor for the auditor's negligence? Explain each item with an exampleWhich of the following cases provides auditors the broadest exposure for liability to thirdparties for ordinary negligence under common law?a. Credit Alliance v. Arthur Andersen.b. Fleet National Bank v. Gloucester Co.c. Rosenblum Inc. v. Adler.d. Ultramares.LO 3 An auditor was sued and found guilty of negligence. For each of the following situations, indicate the likelihood the plaintiff would win if the plaintiff is: A financial institution that the auditor knew was the primary beneficiary of the audit, suing under common law. A stockholder suing under common law. A financial institution that was unknown to the auditor loaned money to the client based on the audit financial statements, but the auditor knew only that the client would use the statements to obtain a loan from some financial institution. The plaintiff is suing under common law. An investor suing under the 1934 Securities Exchange Act. An investor suing under the 1933 Securities Act.