Sun Corp.approved a merger plan with Cord Corp.One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co.,CPAs.Sun had engaged Frank to audit Cord's financial statements.While performing the audit,Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses.For Frank to be liable under common law liability,Sun at a minimum must prove that Frank
A) knew of the irregularities.
B) failed to exercise the appropriate level of professional care.
C) demonstrated gross negligence.
D) acted with scienter.

Question

Quizplus · Accepted Answer

Under common law liability, a CPA must exercise reasonable care and skill in performing an audit. If the CPA fails to do so, and the client suffers losses as a result, the CPA can be held liable for negligence. In this case, Sun must prove that Frank failed to exercise the appropriate level of professional care when auditing Cord's financial statements and that this failure was the cause of Sun's losses. There is no need to prove that Frank had knowledge or acted with intent (scienter) or gross negligence.

Sun CorpApproved a Merger Plan with Cord Corp