A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated.This is an example of which of the following legal liability concepts?

Question

Quizplus · Accepted Answer

This is an example of liability to third parties under common law, as the financial institution is not a client of the audit firm but is affected by the material misstatement of the borrower's financial statements. Under common law, third parties can sue auditors for negligence if they can prove that the auditors had a duty of care, breached that duty by failing to detect material misstatements, and caused the third party to suffer damages.

A Financial Institution Sues the Audit Firm for Failure to Discover