Answered: Edward prepares the report but…

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter9: Auditing The Revenue Cycle.

Section: Chapter Questions

Problem 16CYBK

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Edward, an accountant, is hired by C Ltd to prepare a report on the financial strength of C Ltd. Edward is informed that the purpose of the report is to persuade H Ltd to buy all C Ltd’s shares. Edward prepares the report but carelessly fails to identify that C Ltd is not profitable. Which of the following is accurate concerning Edward’s potential liability for negligent misstatement:

Select one:

a. Edward will not be liable to H Ltd because there was no contract between him and H Ltd

b. Edward will not be liable because his advice was prepared for C Ltd, not H Ltd

c. Edward will be liable because the advice was prepared specifically for the purpose of persuading H Ltd to acquire shares in C Ltd, and it was reasonable for H Ltd to rely on Edward's advice.

d. Edward will not be liable because it was not reasonable for H Ltd to rely on his advice.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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