Hark,CPA,negligently Failed to Follow Generally Accepted Auditing Standards in Auditing

question 27

Multiple Choice

Hark,CPA,negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements.Long's president told Hark that the audited financial statements would be submitted to several,at this point undetermined,banks to obtain financing.Relying on the statements,Third Bank gave Long a loan.Long defaulted on the loan.In jurisdiction applying the Ultramares decision,if Third sues Hark,Hark will:

• A)Win because there was no privity of contract between Hark and Third.
• B)Lose because Hark knew that a bank would be relaying the financial statements.
• C)Win because Third was contributory negligent in granting the loan.
• D)Lose because Hark was negligent in performing the audit.

---

Definitions:

Impairment Rule

Financial accounting guidelines that require a firm to report a reduction in the value of its assets when they are deemed to be worth less than their carrying amount.

Net Operating Profit After Taxes (NOPAT)

NOPAT is a financial metric that calculates a company's theoretical income from operations after taxes, assuming it has no debt.

Interest Income

Income earned from the lending of funds or depositing funds in interest-bearing accounts.

Interest Expense

The cost incurred by an entity for borrowed funds, often recognized in financial statements as a non-operating expense.