Johnson and Peterson Company,CPAs,have Been Hired to Perform a Specialized

Johnson and Peterson Company,CPAs,have been hired to perform a specialized audit of Elmville National Bank.The report that Fran prepares will be presented to Acme Bonding Insurance Company for its review prior to issuing an insurance policy to Elmville Bank to cover embezzlement losses caused by the bank's employees.Fran's firm completes the audit and prepares a report that indicates that there are no significant problems.Unfortunately,Fran negligently omitted certain procedures and failed to notice that Elmville had weak internal controls.These weak controls meant that an employee could easily embezzle large amounts of money from the bank.The bank showed the report to Acme Bonding and Acme renewed the insurance policy.Elmville also used the report to encourage Billy to make a large investment in the bank.Soon thereafter,Elmville Bank failed after one of its employees embezzled large amounts of cash and then disappeared.Discuss the liability of Johnson and Peterson Company to Acme and to Billy under each of the three rules for accountant liability to third parties.