A CPA is sued for common law negligence by a third party who relied on the CPA's audit report. The jurisdiction follows the 'Ultramares' doctrine. Under this doctrine, the CPA will generally be liable to the third party only if:

Answer options:

The third party was a reasonably foreseeable user of the financial statements.

The CPA failed to exercise due diligence.

The CPA committed gross negligence or fraud.

There was privity of contract or a near-privity relationship.

How to approach this question

Recall the specific limitation of the Ultramares doctrine regarding third-party liability.

Full Answer

D.There was privity of contract or a near-privity relationship.✓ Correct

The Ultramares doctrine limits a CPA's liability for ordinary negligence to parties in privity of contract (the client) and intended third-party beneficiaries (near-privity). It does not extend liability to merely foreseeable users. Note: CPAs are liable to any third party for fraud or gross negligence (constructive fraud), but the Ultramares rule specifically restricts liability for *ordinary* negligence.

Common mistakes

Confusing Ultramares (privity) with the Restatement rule (foreseeable limited class).

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