Thomas, CPA, is a regional firm that provides a variety of services to its clients. The following summarizes some issues that it has encountered with three of its audit clients during the most recent year:
• Thomas was engaged by Brown Company to conduct an audit of its financial statements. Brown is a nonpublic entity that is seeking financing and is having the audit conducted because of user demand for audited financial statements. Because this was an initial audit, it took Thomas longer to conduct the audit than anticipated. During this time, economic conditions resulted in a general increase in interest rates, and Brown’s costs of obtaining financing were higher than it had anticipated.
• Green Stores has been an audit client of Thomas for more than 10 years. Following the most recent audit (which resulted in an unmodified opinion on Green’s financial statements), Green Stores learned that its treasurer had been engaged in a significant embezzlement scheme, resulting in Green’s losses in excess of $ 2 million. Throughout Thomas’s 10- year relationship with Green Stores, it had issued unmodified opinions on
Green’s financial statements and had not identified any weaknesses in Green’s internal control or other evidence that suggested the existence of this defalcation scheme.
• Fuchsia Inc. has been an audit client of Thomas for the past five years. During the most recent audit, Thomas identified misstatements that understated Fuchsia’s liabilities; Thomas believed that these misstatements should be corrected in order to fairly present Fuchsia’s financial condition, results of operations, and cash flows in conformity with GAAP. Fuchsia refused to make these misstatements, and Thomas resigned from the engagement. Fuchsia has engaged another auditor, but the delays associated with this change in auditors may result in accelerated payments to Fuchsia’s lenders for failure to provide them audited financial statements on a timely basis.

a. Without specific reference to any of the preceding situations, on what basis/ general areas of liability may clients bring suit against auditors?
b. Without specific reference to any of the preceding situations, what facts must clients demonstrate to bring suit against auditors?
c. Without specific reference to any of the preceding situations, what defenses might be available to auditors for suits brought against them by their clients?
d. For each of the preceding clients, identify the potential basis or bases for legal action that might be brought against Thomas.
e. In your opinion, is Thomas likely to be liable to these clients for its actions? What factors should be considered in assessing Thomas’ potential liability in these situations?

  • CreatedOctober 27, 2014
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