Daniel, a Certified Public Accountant, was hired by Vast Hardware Store to perfo
ID: 2600720 • Letter: D
Question
Daniel, a Certified Public Accountant, was hired by Vast Hardware Store to perform an audit on the store’s financial statements. In their agreement was a clause stating that the audited financial statements would be used “to obtain further inventory financing from Second Bank or another local bank.” Daniel completed the audit and issued an unqualified opinion. Eventually Vast Hardware obtained the financing from Sharp National Bank – which is another local bank. Unfortunately, Daniel had been negligent in conducting the audit, and the inventory had been greatly overstated. As a result, there was inadequate collateral for Sharp’s loan, and when Vast Hardware went bankrupt a few months later, Sharp Bank suffered a loss. Under which rule or rules for accountant’s liability to third parties could Sharp National Bank recover from Daniel? (Discuss all rules that may apply)
Explanation / Answer
The liability of the Accountant for negligence in the conduct of an audit of the financial statement of its client is confined to the client.An accountant is liable for any kind of damages suffered by the Third party due to its negligence only if the accountant knew or should have known that the all third party rely on the audit report and makes further decisions.
In this case the Mr.Daniel,the auditor is liable for the loss suffered by sharp bank due to his negligent conducting the audit.
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