Auditing

Case Study: Ultramares

Corporation
(The auditor liability, duty of
care)

Group3
Lee Shu Yu(4146084)
Chan Ho Wing(4057154)
Agenda
1.
Background 2.Detail of 3. Legal
(Involving Case disputes
parties)

4. Impact 5. Ending
1. Background (Involving parties)

- Fred Stern
-Ultramares
& Company
Corporation
, Inc.
-
Touche,Nive
n&
Company
(Third
 - Fred Stern & Company ,
Inc.
Stern company import rubber ,demanded
in huge quantities by many industries.
During 1920s, the demand of rubber in US
more than tripled
Stern company need a large amount
working capital in operations.

However, Stern company are short of funds

, the company relied heavily on banks and
other landers to finance its day to day
operations.
 -Ultramares -Touche,Niven
Corporation & Company
(Third party)
A prominent accounting firm
A finance company whose based in London and New York
primary line of business was City.
factoring receivable. Touche had served as Sterns
The Stern company lend independent auditor since
$100000 from this company 1920.
Detail of Case
 Touch
e

Ster Ultramar
n es
 Later , Ultramares extended two more loans to Stern totaling
I have unqualified
$65000.
opinion on Sterns
I had been audited a December 31You
OK, should
I will
,1923 ,giveshow
you the
I want to lend
Reported asset of more me your
$100000 loanaudited
according
few months earlier by balance sheet.
than $2.5 $100000
million and a yourbalance
reported sheet
asset and
Touche.
loans (March
networth
During the same time , Stern obtained more balance
of approximately than$300000
first.sheet.in
There is1924)
also 32
$1loans from
million twothe
, and local banks after providing them with copies of
serially number
Decemberaudit
accompanying 31 , report
1925 balance sheet and accompanying audit
copies of that audit
report.
report. Touch
e
Important!!!!!!!!!!!!!!! Touche knew that Stern company will use
that audited report to sought the loans but they didnt know
which finance company Stern will find.
Ster Ultramar
n es
 A accountant with Stern, concealed Sterns bankrupt status from
Unfortunately , Stern company was declaredI bankrupt
Touche!!!! will
Touche auditors.
in January 1925 sue you to
recovery
The accountant masked Sterns true financial my loss.
condition by making
Subsequent courtroom testimony revealed that the
several
I am entries
sorry ~in the companys accounting records.
company had been hopelessly insolvent at the end of
The largest of these entries involved a debit of more than
1923. Touch
$700000 to account receivable and an offsetting credit to sales.
e
However, the audited balance sheet reported a net
worth of $1 million at the end of 1923.

Ster
n Ultramar
es
 Legal
disputes
ENDING
Should Touche company take the
responsibility in this case ?
 Ultramares doctrine
Accountant must have privity of contract (the client) or have a
privity like relationship with the auditors: privity like
relationship
1.) financial reports used for known purpose
2.) for benefit of known party (i.e., specific name of the third-
party)
3.) and account must manifest consent (i.e., agree)