Donald Sharpe recently joined the CPA firm of Spark, Watts, and Wilcox. He quickly established a reputation for thoroughness and a steadfast dedication to following prescribed auditing procedures to the letter. On his third audit for the firm, Sharpe examined the underlying documentation of two hundred disbursements as a test of purchasing. receiving, vouchers-payable, and cash disbursement procedures. In the process he found twelve disbursements for the purchase of materials with .1o receiving reports in the documentation. He noted the exceptions in his working papers and called them to the attention of the in-charge accountant. Relying on prior experience with the client, the in-charge accountant disregarded Sharpe's comments, and nothing further was done about the exceptions.

Subsequently it was learned that one of the client's purchasing agents and a member of its accounting department were engaged in a fraudulent scheme whereby they diverted the receipt of materials to a public warehouse while sending the invoices to the client. When the client discovered the fraud, the conspirators had obtained approximately \(\$ 70,000\), \(\$ 50,000\) of which was after the completion of the audit.

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Discuss the legal implications and liabilities to Spark, Watts, and Wilcox as a result of the above facts.