Principles of Auditing & Other Assurance Services (Irwin Accounting)
20th Edition
ISBN: 9780077729141
Author: Ray Whittington, Kurt Pany
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 4, Problem 27QRA
Gordon & Moore, CPAs, were the auditors of Fox & Company, a brokerage firm. Gordon & Moore examined and reported on the financial statements of Fox, which were filed with the Securities and Exchange Commission.
Several of Fox’s customers were swindled by a fraudulent scheme perpetrated by two key officers of the company. The facts establish that Gordon & Moore were negligent, but not reckless or grossly negligent, in the conduct of the audit, and neither participated in the fraudulent scheme nor knew of its existence.
The customers are suing Gordon & Moore under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the officers. The customers’ suit for fraud is predicated exclusively on the negligence of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme.
Required:
Answer the following, setting forth reasons for any conclusions stated.
- a. What is the probable outcome of the lawsuit? Explain.
- b. What other theory of liability might the customers have asserted?
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Gordon & Moore, CPAs, were the auditors of Fox & Company, a brokerage firm. Gordon & Moore examined and reported on the financial statements of Fox, which were filed with the Securities and Exchange Commission. Several of Fox’s customers were swindled by a fraudulent scheme perpetrated by two key officers of the company. The facts establish that Gordon & Moore were negligent, but not reckless or grossly negligent, in the conduct of the audit, and neither participated in the fraudulent scheme nor knew of its existence. The customers are suing Gordon & Moore under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the officers. The customers’ suit for fraud is predicated exclusively on the negligence of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme.
What is the probable outcome of the lawsuit? Explain.
What other…
Gordon & Moore, CPAS, were the auditors of Fox & Company, a brokerage firm. Gordon & Moore examined and reported on the
financial statements of Fox, which were filed with the Securities and Exchange Commission. Several of Fox's customers were swindled
by a fraudulent scheme perpetrated by two key officers of the company. The facts establish that Gordon & Moore were negligent, but
not reckless or grossly negligent, in the conduct of the audit, and neither participated in the fraudulent scheme nor knew of Its
existence. The customers are suing Gordon & Moore under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 for alding and abetting the fraudulent scheme of the officers. The customers' sult for fraud is predicated
exclusively on the negligence of the auditors in falling to conduct a proper audit, thereby failing to discover the fraudulent scheme.
Required:
Answer the following, setting forth reasons for any conclusions stated.
a. What is…
Mark Williams, CPA, was engaged by Jackson Financial Development Company to audit the financial statements of Apex Construction Company, a small closely held corporation. Williams was told when he was engaged that Jackson Financial needed reliable financial statements that would be used to determine whether to purchase a substantial amount of Apex Construction’s convertible debentures at the price asked by the estate of one of Apex’s former directors.
Williams performed his audit in a negligent manner. As a result of his negligence, he failed to discover substantial defalcations by Carl Brown, the Apex controller. Jackson Financial purchased the debentures, but it would not have done so if the defalcations had been discovered. After discovery of the fraud, Jackson Financial promptly sold them for the highest price offered in the market at a $70,000 loss.
If Apex Construction also sues Williams for negligence, what are the probable legal defenses Williams’s attorney would raise?…
Chapter 4 Solutions
Principles of Auditing & Other Assurance Services (Irwin Accounting)
Ch. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 8RQCh. 4 - Prob. 9RQCh. 4 - Prob. 10RQ
Ch. 4 - Prob. 11RQCh. 4 - Prob. 12RQCh. 4 - Prob. 13RQCh. 4 - Prob. 14RQCh. 4 - Prob. 15RQCh. 4 - Prob. 16RQCh. 4 - Prob. 17RQCh. 4 - Prob. 18RQCh. 4 - Prob. 19RQCh. 4 - Prob. 20QRACh. 4 - Prob. 21QRACh. 4 - Prob. 22QRACh. 4 - Prob. 23QRACh. 4 - Prob. 24QRACh. 4 - Prob. 25QRACh. 4 - Prob. 26QRACh. 4 - Gordon Moore, CPAs, were the auditors of Fox ...Ch. 4 - Prob. 28AOQCh. 4 - Prob. 28BOQCh. 4 - Prob. 28COQCh. 4 - Prob. 28DOQCh. 4 - Prob. 28EOQCh. 4 - Prob. 28FOQCh. 4 - Prob. 28GOQCh. 4 - Prob. 28HOQCh. 4 - Prob. 28IOQCh. 4 - Prob. 28JOQCh. 4 - Prob. 28KOQCh. 4 - Prob. 28LOQCh. 4 - Prob. 29OQCh. 4 - Prob. 30OQCh. 4 - Match the important cases listed below with the...Ch. 4 - Prob. 32OQCh. 4 - Prob. 33OQCh. 4 - Prob. 34PCh. 4 - Prob. 35PCh. 4 - Prob. 36PCh. 4 - Charles Worthington, the founding and senior...Ch. 4 - Prob. 38PCh. 4 - Prob. 39PCh. 4 - Prob. 40PCh. 4 - Prob. 41ITCCh. 4 - Prob. 42RDC
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