A bank sues the auditor after making a loan to Klaxxon, a company that went bankrupt. The bank indicates that they relied on the year-end financial statements of Klaxxon to make the lending decision. The bank analyst indicates that the audit opinion was unqualified so he assumed that Klaxxon was a going concern. The auditor defends himself by referring to a note disclosure in the financial statements about the company's economic dependence on one buyer, Dexters Corp. Dexters Corp had experienced some significant financial trouble for the past year and went bankrupt three months after the financial statements of Klaxxon were released. The PA's liability is likely

Question

Quizplus · Accepted Answer

The auditor may be liable for contributory negligence if they failed to adequately highlight the risk associated with Klaxxon's economic dependence on Dexters Corp, which was disclosed in the notes. However, since the auditor did include the note disclosure, it suggests they did not completely neglect their duty, reducing the likelihood of gross negligence or fraud.

A Bank Sues the Auditor After Making a Loan to Klaxxon