While conducting an audit of a public entity,Wallace failed to identify material misstatements in its client's financial statements.Investors then sued Wallace in connection with this audit.Which of the following would not need to be demonstrated in order for the shareholders to successfully bring suit against Wallace?
A) Wallace was in privity with the shareholders.
B) The shareholders relied upon the materially misstated financial statements.
C) Wallace acted with gross negligence in the audit.
D) The reliance on the materially misstated financial statements caused the shareholders' losses.

Question

Quizplus · Accepted Answer

Unlike in a private company audit, privity (a direct relationship between the auditor and shareholders) is not required for shareholders to bring a lawsuit against an auditor in a public entity audit. Therefore, choice A would not need to be demonstrated for the shareholders to successfully bring suit against Wallace. However, the other three choices (B, C, and D) would need to be demonstrated. The shareholders would need to show that they relied on the financial statements, that Wallace acted with gross negligence, and that their losses were caused by the reliance on the misstated financial statements.

While Conducting an Audit of a Public Entity,Wallace Failed to Identify