ABC Ltd (ABC) engaged the accounting firm of Ace & King to perform its annual audit.Ace amp; King performed the audit in a competent, non-negligent manner and billed ABC for $30 000, the agreed fee.Shortly after delivery of the audited financial report, Sam Lloyd, the assistant controller, disappeared, taking with him $40 000 of ABC's funds.It was then discovered that Sam had been engaged in a highly sophisticated, novel defalcation scheme during the past year.He had previously embezzled $50 000 of ABC's funds.ABC has refused to pay the auditor's fee and is seeking to recover the $90 000 that was stolen by Sam.Which of the following is correct?
A)The auditor cannot recover the audit fee and is liable for $90 000.
B)The auditor is entitled to collect the audit fee and is not liable for $90 000.
C)ABC is entitled to recover the $40 000 defalcation of the current year and is not liable for the $30 000 fee.
D)ABC is entitled to rescind the audit contract and thus is not liable for the $30 000 fee, but it cannot recover damages.

Question

Quizplus · Accepted Answer

The auditor performed the audit in a competent, non-negligent manner, so they are entitled to their fee and are not liable for the embezzlement that they did not detect, especially if it involved a highly sophisticated scheme.

ABC Ltd (ABC) Engaged the Accounting Firm of Ace