It has been generally asserted that a standard of “due care” was sufficient to meet the negligence standard. Yet the chapter also indicates that the court system has been an influence on the development of auditing standards in such areas as related-party transactions, discovery of events subsequent to the balance sheet date, and development of specific procedures required on all audits.

Required
a. If adherence to GAAS is generally considered a sufficient defense, why might the courts decide that the auditors were negligent in the court cases sited in the chapter? What standard of negligence might the courts be utilizing?
b. The chapter also talks about the Herzfeld v. Laventhol et al. case, in which the judge decided that adherence to a literal interpretation of GAAP was not sufficient for fair presentation. What was the court’s rationale? What are the specific implications of the Herzfeld case for auditors?
c. What do these court cases imply regarding a literal interpretation of GAAP and GAAS vs. a “substance” interpretation of the accounting and auditing standards?