Susan Jason, CPA, had been auditing the financial statements of Rosfeld Stores, Inc,, a large department store, for several years. During the last two years a nationwide economic recession had affected Rosfeld's sales and net income severely. The company, looking for ways to lower operating expenses, constantly asked Jason how the audit fee could be reduced.

One day Rosfeld's president called Jason and suggested a method for saving money on the forthcoming audit. The president suggested that his personnel select the customer accounts to which confirmation letters would be sent. The same personnel would write and mail the confirmation letters. All of these procedures would be performed under the supervision of one of Jason's auditors.

Jason agreed to this procedure. As the auditor watched, two of Rosfeld's employees selected every fifth account, wrote a confirmation letter, and mailed the letters with the CPA firm's return address on the envelope. All of the confirmation letters were returned by the customers directly to the auditor with indications that the amount of accounts receivable on Rosfeld's books was correct. Jason issued a report with an unqualified opinion.

The next year it was discovered that Rosfeld Stores, Inc., had been inflating its sales by creating "dummy" customers, complete with assumed records and files. Rosfeld declared bankruptcy, and its creditors filed suit against Jason for negligence and fraud.
Required:
Answer the following questions.

a. Name the auditing standards that, in your opinion, were violated. Give reasons for your answers.

b. What conditions would have to exist for the creditors to be regarded by the court as primary beneficiaries?

c. What conditions would have to exist for the creditors to be regarded by the court as foreseen parties?

d. What conditions would have to exist for the creditors to be regarded by the court as foreseeable parties?

e. If the creditors were regarded as foreseen parties, would they probably win their negligence case? Give reasons for your answer.

f. Assume that Rosfeld Stores' securities are traded on the New York Stock Exchange. In your opinion, would investors be able to prove that scienter existed? Give reasons for your answer.