Question

Scott Enterprises, a client of Stark & Associates, an accounting firm, claimed that Stark fraudulently prepared an audit. To hold the accounting firm liable, which of the following elements must be established?

Answer 1

To hold Stark & Associates liable for fraudulent audit preparation, Scott Enterprises must establish duty of care, breach of duty, causation, and fraudulent intent or recklessness. These elements form the basis of a fraud claim in auditor liability cases.

Step-by-step explanation:

To hold Stark & Associates liable for fraudulent preparation of an audit, Scott Enterprises must establish several key elements. These include demonstrating that a duty of care was owed by the accounting firm to Scott Enterprises, proof of a breach of that duty, and evidence that the breach directly caused damages.

Additionally, it must be shown that the actions of Stark & Associates were intentional or reckless, constituting fraudulent behavior.

Specifically, these elements are:

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• Proof that Stark & Associates owed a duty to Scott Enterprises, usually established through an auditor-client relationship.
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• Evidence that Stark & Associates breached this duty, which could involve deviation from generally accepted auditing standards or practices.
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• A clear causal link between the breach of duty and any damages suffered by Scott Enterprises.
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• Demonstration that the breach involved fraudulent intent or was executed with recklessness towards the truth.

The burden of proof is on Scott Enterprises to provide sufficient evidence for each of these elements for a court to find Stark & Associates liable for fraud.