(1) The third party user does not have the burden of proof that she/he relied on the
financial statements. 134 (2) The third party has the burden of proof that the auditor was either negligent or fraudulent in doing the audit. (3) Thethirdpartyuserdoesnothavetheburdenofproofthatthelosswascausedby the misleading financial statements. (4) The auditor will not be liable if he or she can demonstrate due diligence in performing the audit. DISCUSSION QUESTIONS AND PROBLEMS 5-18 (Objectives 5-3, 5-4, 5-5, 5-6) Following are 8 statements with missing terms involving auditor legal liability. Under the Ultramares Doctrine, an auditor is generally not liability for _____ to third parties lacking _____. The auditor will use a defense of _____ in a suit brought under the 1933 Securities Act. After passage of the Private Securities Litigation Reform Act, auditors generally have _____ liability in federal securities cases. The broadest class of third parties under common law is known as _____. Based on the ruling in Hochfelder v. Ernst & Ernst, an auditor generally must have knowledge and _____ to be found guilty of a violation of Rule 10b-5 of the 1934 Act. Under the 1933 Act, plaintiffs do not have to demonstrate _____ , but need merely demonstrate the existence of a _____. _____ is generally only available as a defense in suits brought by clients.
A third party lacking privity will often be successful in bringing a claim against the auditor if they can demonstrate_____ or _____. Terms Due diligence g.PInDteFnt toEdenceihveancer Reliance on the financial statements Fraud Ordinary negligence Separate and proportionate Contributorynegligence Privity of contract Gross negligence Foreseen users Material error or omission For each of the 11 blanks in statements 1 through 8, identify the most appropriate term. No term can be used more than once. 5-19 (Objectives 5-4, 5-5) 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 summari- zation 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 Stuart’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
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- Fall '19
- Financial audit, Auditor's report