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Tan and Canada, a firm of certified public accountants, audited the accounts of Sterling Skins, Inc., a corporation that imports and deals in fine furs. Upon completion of the examination, the auditors supplied Sterling Skins with twenty copies of the certified statement of financial statement. The firm knew in a general way that Sterling wanted that number of copies of the auditor's report to furnish to banks and other potential lenders.

The statement of financial position I question was in error by approximately P800,000. Instead of having a P600,000 net worth, the corporation was insolvent. The management of Sterling Skins had doctored the books to avoid bankruptcy. The assets had been overstated by P500,000 of fictitious and nonexisting accounts receivable and P300,000 of nonexisting skins listed as inventory when in fact Sterling Skins had only empty boxes. The audit failed to detect these fraudulent entries. JC, relying on the certified statement of financial position loaned Sterling Skins P200,000. They seek to recover their loss from Tan and Canada.

Required:

State whether each of the following is true or false and give your reasons:

a. If JC alleges and proves negligence on the part of Tan and Canada he will be able to recover his loss.

b. If JC alleges and proves constructive fraud (that is, gross negligence on the part of Tan and Canada) he will be able to recover his loss.

c. JC does not have a contract with Tan and Canada.

d. Unless actual fraud on the part of Tan and Canada could be shown, JC could not recover.

e. JC is a third-party beneficiary of the contract Tan and Canada made with Sterling Skins.