HW3 - HW 3 5-18 a. Yost and Co. should use the defenses of...

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HW 3 5-18 a. Yost and Co. should use the defenses of meeting auditing standards and contributory negligence. The fraud perpetuated by Stuart Supply Company was a reasonably complex one and difficult to uncover except by the procedures suggested by Yost. In most circumstances it would not be necessary to physically count all inventory at different locations on the same day. Furthermore the president of the company contributed to the failure of finding the fraud by refusing to follow Yost's suggestion. There is evidence of that through his signed statement. b. There are two defenses Yost and Company should use in a suit by First City National Bank. First there is a lack of privity of contract. Even though this was a known third party, it does not necessarily mean that there is any duty to that party in this situation. That defense is unlikely to be successful in most jurisdictions today. The second defense which Yost is more likely to be successful with is that the firm followed auditing standards in the audit of inventory, including the employment of due care. Ordinarily it is unreasonable to expect a CPA firm to find such an unusual problem in the course of an ordinary audit. Because the CPA firm did not uncover the fraud does not mean it has responsibility for it. c. She is likely to be successful in her defense against the client because of the contributory negligence. The company has responsibility for instituting adequate internal controls. The president's statement that it was impractical to count all inventory on the same day because of personnel shortages and customer preferences puts considerable burden on the company for its own loss. It is also unlikely that First City National Bank will be successful in a suit. The court is likely to conclude that Yost followed due care in the performance of her work. The fact that there was not a count of all inventory on the same date is unlikely to be sufficient for a successful suit. The success of Yost's defenses is also heavily dependent upon the
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This note was uploaded on 05/20/2008 for the course ACCOUNTING 419 taught by Professor Magdyfarag during the Spring '08 term at Cal Poly Pomona.

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HW3 - HW 3 5-18 a. Yost and Co. should use the defenses of...

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