In: Accounting
Three approaches to the application of the foreseen users' concept are (1) the Credit Alliance approach, (2) the restatement of torts approach, and (3) the foreseeable user approach. Summarize each of these three approaches.
Ans:-
Three approaches to the application of the foreseen users' concept are as follows:
1. Under the Credit Alliance approach :- upholds the concept of privity of contract established by Ultramares Corporation v. Touche case. Under this approach, for an auditor to be liable to third parties, the auditor :
(i) must know and intend that the work product would be used by the third party for a specific purpose, and
(ii) the knowledge and intend must be evidenced by the auditor's conduct.
2. Under the restatement of torts approach :- foreseen user must be members of a reasonably limited and identifiable group of users that have relied on the CPA's work, such as creditors, even though those persons were not specifically know to the CPA at the time the work was done.
3. under the foreseeable user approach :- any users that the auditor should have reasonably been able to foresee as likely users of the client's financial statements have the same rights as those with privity of contract.