A CPA is sued for negligence by a third party who relied on the CPA's audited financial statements. 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 foreseen user of the financial statements.

The third party was a reasonably foreseeable user.

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

The CPA committed gross negligence or fraud.

How to approach this question

Ultramares = Strict Privity (or very close to it). It is the most protective standard for CPAs regarding ordinary negligence.

Full Answer

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

Under the Ultramares doctrine, a CPA is liable for ordinary negligence only to parties in privity of contract (the client) or intended third-party beneficiaries (near-privity). Liability to foreseen or foreseeable third parties generally requires fraud or gross negligence under this doctrine.

Common mistakes

Confusing Ultramares (Privity) with the Restatement rule (Foreseen Class).

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