ExpertHard1 markMultiple Choice
CPA · Question 08 · Area I: Ethics & Tax Procedures
A CPA firm negligently prepared a financial statement for a client. The firm knew the client intended to use the statement to obtain a loan from Bank A. However, the client actually used the statement to obtain a loan from Bank B. Bank B relied on the statement and suffered a loss. In a jurisdiction that follows the 'Ultramares' doctrine, is the CPA firm liable to Bank B?
A CPA firm negligently prepared a financial statement for a client. The firm knew the client intended to use the statement to obtain a loan from Bank A. However, the client actually used the statement to obtain a loan from Bank B. Bank B relied on the statement and suffered a loss. In a jurisdiction that follows the 'Ultramares' doctrine, is the CPA firm liable to Bank B?
Answer options:
A.
Yes, because the negligence caused the loss.
B.
Yes, because Bank B is a foreseen third party.
C.
No, because Bank B was contributory negligent.
D.
No, because there was no privity of contract between the CPA firm and Bank B.
How to approach this question
Identify the jurisdiction rule: Ultramares = Privity (strict). Restatement = Foreseen Class. Foreseeability = Any Foreseeable User.
Full Answer
D.No, because there was no privity of contract between the CPA firm and Bank B.✓ Correct
D
The Ultramares doctrine limits CPA liability for negligence to parties in privity of contract and specifically intended third-party beneficiaries. Since the CPA firm did not know of Bank B (they thought it was for Bank A), there is no privity, and thus no liability to Bank B for negligence.
Common mistakes
Applying the Restatement (Foreseen Third Party) rule instead of Ultramares.
Practice the full CPA REG Practice Exam 5
72 questions · hints · full answers · grading
More questions from this exam
Q01A CPA is representing a client, TechSolutions Inc., in an IRS examination regarding a large resea...HardQ02A tax return preparer is engaged to prepare a return for a client who has engaged in a transactio...HardQ03Which of the following statements accurately describes the disciplinary authority of a State Boar...HardQ04A taxpayer filed their Year 1 individual income tax return on March 15, Year 2. The return showed...HardQ05A taxpayer disagrees with a proposed IRS deficiency and wishes to litigate the matter. The taxpay...Hard