Auditor’s Legal Liability to Third Parties

increase li major power of other professionals to nonprofits users of their services II. Lack of fairness of Imposing the hindrance of economic loss on Innocent financial statement users Ill. supposition that expanded liability will cause auditors to improve their auditing procedures v. Auditors have the ability to commence liability insurance v. Increased audit and insurance subvention costs fuck be passed on to the client 4. Reasonably predict satisfactory third parties (used by MS, NJ, WI) a. Ore expansive definition regarding the sub judice standing of who can sue the auditor I. Allows broader class of (stockholders or stockbrokers, for example) might say regarding the true of financial reports Reflection While WI, NJ and MS have a very expansive definition of who ought to be able to have legal standing to sue auditors for audit reports of financial statements if the auditor appears to have been heed little or committed fraud, there mustiness(prenominal) be some diffe rence struck to protect both auditors and third parties that may rely on audit reports.The Restatement Standard, as used by most states, appears to strike that balance, belongings auditors accountable for potential negligence or fraud, while still allowing them to obtain liability insurance to limit their exposure to legal claims. Chapter 20, problem 20-27 a. What elements must be established by Musk to raise a cause of implement based on negligence?Since state law applicable to this run follows the chromatic decision, which sets the standard for auditor negligent liability by a third party according to precedency, in which a contract or specific agreement exists between the two parties, Musk would need to show that a contract existed between Apple and Musk to have legal standing to realise a suit against Apple. B. What elements must be established by Musk to support a cause of action based on a see lob-5 violation?If Musk has established that it can sue under Section II(b), it must prove the following 1 . Apple made a material, genuine misrepresentation or omission 2. Musk relied on the financial statements . Musk suffered damages as a result of reliance on the financial statements 4. Sciences (Apple acted with intent to deceive, defraud, or with knowledge of a false representation) c.Is Apples assertion regarding need of priority pay off with regard to Musks causes of action for negligence or fraud? Regarding negligence, Apples assertion regarding Musks lack of priority is correct according to the standard set by the ultramarine decision. There was no contract between Apple and Musk. However, regarding the fraud charge, the priority requirement does not apply. If the plaintiff an show gross negligence or fraud, the auditor can still be held credible for damages.As stated in the problem, Apple was aware that Astor was selling inventory at prices substantially less than cost, so it should have known that the inventory valuation provided by Astor s hould not have been trusted, and should have conducted its own valuation of inventory. While the application of the Ultramarine decision will make it difficult to hold Apple liable for negligence under common law, that decision does not hold weight when considering fraud or gross negligence. In that case, Musk may be able to collect damages on the basis of Rule bib-5.