4. Melvin, a CPA, was hired by Buy-Um-Up Inc., to audit its financial statements

Question

4. Melvin, a CPA, was hired by Buy-Um-Up Inc., to audit its financial statements. Due to his negligence, Melvin failed to discover that Morris, chairman the board of directors of Buy-Um-Up, had embezzled $400,000 of the company funds. Melvin finished the audit and issued an unqualified opinion. Six months later, Melvin read in the newspapers that Carl had been caught for embezzling a total of $1,000,000 of company funds. Carl resigned and the company funds were fully recovered from him. Buy-Um-Up sued Melvin. For how much, if anything, is Marvin liable? A. $1,000,000 B. $400,000 C. $1,200,000 D. $600,000 E. Nothing, Melvin is not liable for Morris' embezzlement.

Explanation / Answer

E. Nothing, Melvin is not liable for Morris' embezzlement

Explanation -

Melvin is not liable for Morris' embezzlement as it comes under comparative negligence as CPAs may defend against a breach of contract if they can prove that the client’s loss occurred because of factors other than negligence by the auditors. If the auditor proves the loss resulted from causes other than the auditor’s negligence, thus client may be accused of contributory negligence.

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