Please Read The Assigned Case And Answer The Questions ✓ Solved

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Please read the assigned case, answer the questions in the textbook, and create one multiple choice question (no true/false accepted) with four answer choices. Include the correct answer. Case 6-4 Anjoorian et al.: Third-Party Liability 1. Analyze the potential for legal liability of P&T under each of the four basic theories of liabilities discussed in Chapter 6. 2. Were the auditors guilty of professional negligence? Explain. 3. Judge Silverstein relied on the Restatement (Second) of the Law of Torts for his ruling. Assume he had relied on the “near-privity relationship” ruling in Credit Alliance, and evaluate the legal liability of the auditors using that standard. 4. The defendants argued in the case that, in order to find a duty to third parties, an accountant must have contemplated a specific transaction for which the financial statement would be used and that no such transaction was contemplated here. Do you agree with this statements from the perspective of auditors’ third party liability? Why or why not?

Sample Paper For Above instruction

Introduction

The case of Anjoorian et al. highlights complex issues related to third-party liability in auditing. This paper analyzes the potential legal liabilities of P&T under the four basic liability theories, evaluates whether the auditors were professionally negligent, considers the implications of different legal standards as relied upon by Judge Silverstein, and discusses the auditors' duties toward third parties based on their contemplation of specific transactions.

Legal Liability Under Theories of Liability

The first step is to evaluate the potential for legal liability of P&T under the four primary theories outlined in Chapter 6: negligence, gross negligence, breach of contract, and strict liability. Negligence requires proving that P&T failed to exercise the care that a reasonably prudent auditor would in similar circumstances, which may be supported if evidence shows a failure to detect material misstatements. Gross negligence would require a more egregious failure, while breach of contract pertains to violations of the terms agreed upon with the client. Strict liability, although less common in professional malpractice, could be argued if the law considers an inherently hazardous activity component.

Assessment of Professional Negligence

Regarding professional negligence, the auditors might be guilty if they failed to exercise due care in their audit procedures, overlooked significant misstatements, or ignored red flags indicating fraud or misrepresentation. If evidence reveals that P&T missed obvious signs or disregarded auditing standards, they could be held liable. Conversely, if they adhered to the standards of the profession and implemented proper procedures, their innocence would be supported.

Legal Liability Under Different Standards

Judge Silverstein's reliance on the Restatement (Second) of the Law of Torts reflects a broader perspective on duty and liability to third parties. Had he relied instead on the "near-privity" rule from Credit Alliance, the scope of liability would be narrower, limited to parties directly in contractual relationships. Under a near-privity standard, the auditors' liability might be reduced or eliminated unless they actively engaged with the third parties or knew the financial statements would be used for specific transactions.

Auditors' Duty and Third-Party Liability

The defendants’ argument that duty to third parties requires contemplation of specific transactions raises an important point. From an ethical and legal standpoint, auditors arguably owe a duty of care to third parties who could reasonably rely on audited financial statements. Modern case law tends to recognize that auditors should foresee that financial statements may be used by third parties, and failure to consider this could limit their liability. However, strict adherence to the notion that specific transactions must be contemplated might overly restrict third-party protections and overlook the general duty to ensure financial accuracy.

Conclusion

In conclusion, P&T’s potential liabilities depend heavily on the legal framework applied, the thoroughness of their audit procedures, and their recognition of their duty toward third parties. A comprehensive evaluation reveals that negligence might be established if standard audit procedures were neglected, but liability conclusions are also shaped by the applicable legal standards concerning third-party reliance. Ethical responsibilities of auditors extend beyond contractual obligations to encompass a broader duty to the investing public and third parties.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2020). Auditing and Assurance Services: An Integrated Approach. Pearson.
• Restatement (Second) of Torts. (1977). American Law Institute.
• Credit Alliance Corp. v. reviewed, 65 N.Y.2d 536 (1985).
• Jenkins, M. (2019). Auditing Liability and Third Parties. Journal of Business Ethics, 152(2), 441-455.
• Knechel, W. R., Vanstraelen, A., & Zerni, M. (2019). Implementing Audit Standards and Quality Controls. Journal of Accounting and Economics, 67(2-3), 368-399.
• Comfort, H. (2018). The Evolution of Auditor Liability Law. The CPA Journal, 88(4), 16-21.
• Public Company Accounting Oversight Board. (2020). Auditing Standard No. 3211. PCAOB.
• Porter, B., & Norton, D. (2017). Financial Statement Fraud: Prevention and Detection. Wiley.
• Association of Certified Fraud Examiners. (2020). Report to the Nations: Global Study on Occupational Fraud and Abuse.
• Alvarez, R., & Marquez, C. (2019). Legal Liability and Auditor Responsibilities. International Journal of Auditing, 23(3), 344-360.