Question

Bugle Corp. approved a plan of merger with Stanley Corp. One of the determining factors in approving the merger was the strong financial statements of Stanley which were audited by Dennis & Co., CPAs. Bugle had engaged Dennis to audit Stanley's financial statements. While performing the audit, Dennis failed to discover certain instances of fraud which have subsequently caused Bugle to suffer substantial losses. In order for Dennis to be liable under common law, Bugle, at a minimum, must prove that Dennis:
Failed to exercise due care.



Acted recklessly or with lack of reasonable grounds for belief.



Was grossly negligent.



Knew of the instances of fraud.

Answer 1

Answer:

A). Failed to exercise due care.

Explanation:

As per the given details, Bugle Corp. needs to prove that Dennis & Co. failed to exert the required care which it was supposed to exercise while auditing the financial statements of Stanley Corp. This failure led Bugle Corp. to suffer major losses and thus, they must be accountable for this loss under the general law as they ignored the potential hazards. Legally, this is unlawful as they were expected to ensure that these hazards must have addressed and told Bugle Corp. on time but since they failed, they are guilty of the crime. Hence, option A is the correct answer.