Gdansk Corporation, a closely held private manufacturer of car parts, sought a loan from the Royal Bank (Bank) The Bank had previously extended a $60,000 credit to Gdansk but refused to lend any additional money without obtaining copies of Gdansks audited financial statements Gdansk contacted the CPA firm of Amerski Yarmolinsky to perform the audit In arranging for the audit, Gdansk clearly indicated that its purpose was to satisfy the Bank as to the corporations sound financial condition and to obtain an additional loan of $100,000 Amerski Yarmolinsky accepted the engagement, performed the audit in a negligent manner, and rendered an unqualified opinion If the audit would have been conducted according to CAS the financial statements would have been found to contain a material misstatement and be misleading Gdansk submitted the audited financial statements to the Bank and obtained an additional loan of $70,000 The Bank refused to lend more than that amount Gdansk is now in bankruptcy, and the Bank seeks to collect from Amerski Yarmolinsky the $130,000 it loaned to Gdansk Required Will the Bank succeed in a lawsuit against Amerski Yarmolinsky for the $130,000 If so what must they prove

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Posted on Mar 31, 2022

Gdansk Corporation, a closely held private manufacturer of car parts, sought a loan from the Royal Bank (Bank). The Bank had previously extended a $60,000

Gdansk Corporation, a closely held private manufacturer of car parts, sought a loan from the Royal Bank (Bank). The Bank had previously extended a $60,000 credit to Gdansk but refused to lend any additional money without obtaining copies of Gdansk’s audited financial statements. Gdansk contacted the CPA firm of Amerski & Yarmolinsky to perform the audit. In arranging for the audit, Gdansk clearly indicated that its purpose was to satisfy the Bank as to the corporation’s sound financial condition and to obtain an additional loan of $100,000.
Amerski & Yarmolinsky accepted the engagement, performed the audit in a negligent manner, and rendered an unqualified opinion. If the audit would have been conducted according to CAS the financial statements would have been found to contain a material misstatement and be misleading. Gdansk submitted the audited financial statements to the Bank and obtained an additional loan of $70,000. The Bank refused to lend more than that amount. Gdansk is now in bankruptcy, and the Bank seeks to collect from Amerski & Yarmolinsky the $130,000 it loaned to Gdansk.
Required: Will the Bank succeed in a lawsuit against Amerski & Yarmolinsky for the $130,000? If so what must they prove?

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Yes Royal Bank can sue under Tort Law for the auditors carelessness but it will have to prove to a Court of Law that the auditors firm was reckless and that they breached their duties They relied on the documents they signed with negligence and as a result they suffered losses The Bank will be only able to sue them for the 70000 they paid after the audit ... blur-text-image