If a CPA firm is being sued for common law fraud by a third party based upon materially false financial statements,which of the following is the best defense the auditors could assert?
A) Lack of privity.
B) Lack of reliance.
C) A disclaimer contained in the engagement letter.
D) Contributory negligence on the part of the client.

Question

Quizplus · Accepted Answer

Lack of privity and a disclaimer contained in the engagement letter are not strong defenses in cases of common law fraud. Contributory negligence on the part of the client is not relevant to the auditor's liability for fraud. The best defense the auditor could assert is lack of reliance, meaning that the third party did not rely on the financial statements in making their decision and therefore cannot claim damages as a result of the fraud.

If a CPA Firm Is Being Sued for Common Law