Melvin, a CPA, was hired by Buy-Um-Up Inc., to audit its financial statements. D
ID: 452488 • Letter: M
Question
Melvin, a CPA, was hired by Buy-Um-Up Inc., to audit its financial statements. Due to his negligence, Melvin failed to discover that Morris, chairman the board of directors of Buy-Um-Up, had embezzled $400,000 of the company funds. Melvin finished the audit and issued an unqualified opinion. Six months later, Melvin read in the newspapers that Carl had been caught for embezzling a total of $1,000,000 of company funds. Carl resigned and the company funds were fully recovered from him. Buy-Um-Up sued Melvin. For how much, if anything, is Marvin liable? A. $1,000,000 B. $400,000 C. $1,200,000 D. $600,000 E. Nothing, Melvin is not liable for Morris' embezzlement.
Explanation / Answer
This situation can be compared to Separate and Proportionate liability arising from auditor's negligence. In this the auditor is liable is for the amount of loss suffered by the plantiff.
In the above scenario, Buy-Um-Up Inc can sue Mevin CPA for the amount where he was negligent. Since, Melvin failed to discover the embezzlement of $400,000 due to negligence ,he can be sued for $400,000.
Hence, the right answer is Option B