case.rtf - Cases Relating to Legal Liability of Auditor 5-20 Lauren Yost Co a medium sized CPA firm was engaged to audit Stuart Supply Company Several

case.rtf - Cases Relating to Legal Liability of Auditor...

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Cases Relating to Legal Liability of Auditor 5-20 Lauren Yost & Co, a medium sized CPA firm, was engaged to audit Stuart Supply Company. Several staff were involved in the audit, all of whom had attended the firm's in house training program on effective auditing methods. Throughout the audit, Yost spent most of her time in the field planning the audit, supervising the staff, and reviewing their work. A significant part of the audit entailed verifying the physical count, cost, and summarization of inventory. Inventory was highly significant to the financial statements, and Yost knew the Inventory was pledged as collateral for a large loan to First City National Bank. In reviewing t's inventory count procedures, Yost told the president she believed the method of counting inventory at different locations on different days was highly undesirable. The president stated that it was impractical to count all inventory on the same day because of personnel shortages and customer preference. After considerable discussion. Yost agreed to permit the practice if the president would sign a statement that no other method was practical. The CPA firm had at least one person at each site to audit the inventory count procedures and actual count. There were more than 40 locations. Eighteen months later, Yost found out that the worst had happened. Management below the president's level had conspired to materially overstate inventory as a means of covering up obsolete Inventory and Inventory losses resulting from mismanagement. The misstatement occurred by physically transporting inventory at night to other locations after it had been counted in a given location. The accounting records were inadequate to uncover these illegal transfers Answer the following questions, setting forth reasons for any conclusions stated: a. What defense should Lauren Yost & Co. use in the suit by Stuart? b. What defense should Lauren Yost & Co. use in the suit by First City National Bank? c. Is Most likely to be successful in her defenses? d. Would the issues or outcome be significantly different if the suit was brought under the Securities Exchange Act of 1934? Solution: 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.
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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 the bank 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
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  • Fall '20
  • NA
  • Financial audit, External auditor, Auditor's report

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