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Chapter 20 - Chapter 20 Legal Liability CHAPTER 20 LEGAL...

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Chapter 20 - Legal Liability 20-1 CHAPTER 20 LEGAL LIABILITY Answers to Multiple-Choice Questions 20-14 d 20-20 c 20-15 c 20-21 c 20-16 b 20-22 a 20-17 d 20-23 b 20-18 b 20-24 d 20-19 d 20-25 d Solutions to Problems 20-26 City Bank is not likely to prevail against Salam based on ordinary negligence. In order to establish a cause of action for negligence against Salam, City must prove that: Salam owed a legal duty to protect City. Salam breached that legal duty by failing to perform the audit with the due care or competence expected of members of the profession. City suffered actual losses or damages. Salam's failure to exercise due care proximately caused City to suffer damages. The facts of this case establish that Salam was negligent by not detecting the overstatement of accounts receivable because of his failure to follow the audit program. However, Salam will not be liable to City for negligence because Salam owed no duty to City. This is the case because Salam was not in privity of contract with City, and the financial statements were neither audited by Salam for the primary benefit of City, nor was City within a foreseen (known and intended) class of third-party beneficiaries who were to receive the audited financial statements. City Bank is likely to prevail against Salam based on constructive fraud. To establish a cause of action for constructive fraud, City must prove that: Salam made a materially false statement of fact. Salam lacked a reasonable ground for belief that the statement was true. Constructive fraud may be inferred from evidence of gross negligence or recklessness. Salam intended another to rely on the false statement.
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