Beckler & Associates, CPAs, audited and expressed an unqualified opinion on the financial statements of Queen co. the financial statements contained misstatements that resulted in a material overstatement of Queenˇ¦s net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queenˇ¦s default. Which of the following must Mac prove to recover?

I.                      Beckeler was negligent in conducting the audit

II.                    Mac relied on the financial statements

a)      neither I nor II

b)      I only

c)      Both I and II

d)      II only

I thought answer would be B. however gleam says that the answer in C. but isnˇ¦t this negligent that plaintiff doesnˇ¦t need to prove Reliance?

Can anyone help me to understand this?

Thank you.

is this a CPA's negligent and Mac is a 3rd party intended beneficiary(foreseen user) so plaintiff needs to only prove 1) material misstatement 2) failure of duty of due care 3) loss 4) causality?

A client suing a CPA for negligence must prove each of these factors, except reliance.  That is true.

When a CPA knows that a third party will be relying on the financial statements, then the CPA owes a duty of care to the third party (in this question, Mac).  Mac can sue the CPA for negligence and needs to show that the CPA owed a duty of care to Mac;  the CPA breached the duty by failing to act with due care.  The CPA knew Mac relied on the financial statements, and because of the reliance suffered a loss.  If Mac didn't rely on the financial statements then it would not have a basis for the lawsuit. So c) is right answer.