Ultramares Banks, investors, financial institutes and creditors depend on the transparency and authenticity of company’s financial statements (that builds trust, reliability and confidence) to either invest in the company or lend funds to the company. Auditor’s opinion is a key element which ensures that the financial statements are correct, reliable, accurate and present truthful values. The accountant has a major responsibility in preparing and presenting financial information to users of financial
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the loss. Based on cases, Ultramares Corporation v. Touche (1931) , the third parties relied on the audited financial report which lead to fraudulent created by the client. The Ultramares Corporation suffered the loss because of the fraudulent mispresentation by accountants . The court stated that the accountants are not liable to third parties for honest blunders beyond the bounds of the original contract unless they were primary beneficiaries. These called as Ultramares doctorine. Back to Danial
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Upon examination of Ultramares, certain criteria may be gleaned. Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes, (2) in the furtherance of which a known party or parties was intended to rely, and (3) there must have been some conduct on the part of
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Chapter 4--Overview of Auditor’s Legal Liability Liability to Clients-Common Law An auditor is in a contractual relationship with a client. If the auditor does not perform his or her side of the bargain according to contract terms the client can sue for breach of contract. A client may seek these remedies for breach of contract: (1) specific performance; (2) general monetary damages for losses incurred as a result of the breach; and (3) consequential damages that occur indirectly as a result of the
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41.2 Definition of Security Are the notes issued by Co-Op “securities”? In order to answer whether or not these notes are securities we need to understand what a security is. According to our textbook (p.647), the definition of security: (1) An interest or instrument that is common stock, preferred stock, a bond, a debenture, or a warrant (2) An interest or instrument that is expressly mentioned in securities acts; and (3) an investment contract. Next, we can use the family resemblance test
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1 Chapter 41.2 Definition of Security The Farmer’s Cooperative of Arkansas and Oklahoma (Co-Op) was an agricultural cooperative that had approximately 23,000 members. To raise money to support its general business operations, Co-Op sold to investors promissory notes that were payable upon demand. Co-Op offered the notes to both members and non-members, advertised the notes as an “investment program,” and offered an interest rate higher than that available on savings accounts at financial institutions
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Unit 11 1. Insurance is determined based on the risk of the environment and is estimated to anticipate losses that could financially damage the insurers future. Because of the unanticipated risk involved I highly recommend that the law imposes a duty to insurance agent to become “liable for failure to advise a client of every possible insurance option, and the insured would be relieved of any burden to take care of his or her own financial needs and expectations.” (Jentz,2010,Pg1003) Unfortunate
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Legal Thinking Which of the following three legal theories did the Court apply in making its decision in this case? a. Ultramares doctrine b. Section 552 of the Restatement (Second) of Tort c. Foreseeability standard Before we can determine the doctrine used by the court, I would like to first dismiss the ones that do not apply. a. The court could not have used the Ultramares doctrine because GKCO was not in privity relationship with the bank or any other third parties. b. The use of Section
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Phar-Mor Case 4.6 Questions 1. a) By hiring a member of its external audit team a company could gain insight into the auditor’s process and better devise methods of hiding fraud. b) Hiring a former auditor would greatly compromise and possibly impair the existing external auditor’s ability to remain independent. On top of having knowledge about the auditor’s practice, preexisting relationships could cause bias in the audit outcome. c) Sarbanes-Oxley Act 2002 limits the ability of corporations
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Knapp Case 7.5 Due Fred Stern-Ultramares 1. The benefits of courts “socialize” investment losses means that the government gets to share with the public all profits and losses through a variety of legal measures. In the case, the auditor has been pushed too much into liability. The auditors claimed not to be liable to the third parties in the case. I think the courts should socialize these losses and because of the case many auditors began to carefully prepare their reports. The reports that
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