Bristol Steel Corporation (BSC) manufactures steel products. In 2020, the treasurer of BSC invested excess funds into a speculative stock with the intention of liquidating the stock at some time in the future when the funds were required.The amount is material. After two months, the stock incurred a significant loss and was sold shortly thereafter. The controller prepared a journal entry to record the transaction as a sale of old inventory so the company showed a lower profit on sales than usual, but no trading loss.

The auditor provided an unmodified opinion on the 2020 financial statements.In 2021, the shares of the company were purchased by a private equity firm. The private equity firm relied on the 2020 audited financial statements. The error was discovered after the audited financial statements were issued.

Required

Assume that the private equity form sued the auditors. Explain how the 4 elements of negligence would apply to this case. What conclusion would you make following your evaluation of the 4 conditions of negligence?