Practice Problem 1:

Raven & Gee-Gee LLP, Public Accountants, issued an unqualified audit report on the financial statements of Drummond Services Inc. (DSI) as at December 31, 2018 on February 14, 2019. On February 20, 2019, DSI ceased operations and sought bankruptcy protection. Almost immediately after DSI sought bankruptcy protection, the creditors and shareholders of DSI initiated a lawsuit against Ravens LLP alleging that the firm must have been negligent in performing its annual financial statement audit for the year then-ended, otherwise the company would not have failed.

Bob Raven was the partner in charge of the audit of DSI. Tony Gee-Gee was not involved in the DSI audit in any way. Raven & Gee-Gee is a limited liability partnership.

Required:

a)What 4 criteria must the creditors and shareholders of DSI demonstrate to be successful in winning a lawsuit against Raven & Gee-Gee LLP? Explain each briefly.

b)What is the source of legal liability that Raven and Gee-Gee LLP were sued under?

c)Identify and explain the 3 other major sources of auditor's legal liability and give an example of a potential claim or charge for each