Case Study 5-27

Auditing
Mary Daly, Erik Carlson, Julie Montesdeoca
Part One
a. Mitchell and Moss has no liability towards Thaxton because
Thaxton is just a shareholder of Whitlow & Company. Under the
SEC Act of 1934 every company with securities traded is required
to submit audited statements annually. Auditors potentially face
legal exposure for quarterly information or other reporting
information filed with the SEC, under this act. Auditors must
perform a review of the 10-Q, before it is filed. Mitchell and Moss
audit should have caught the embezzlement, saving clients and
the business millions of dollars, had they correctly reviewed the
quarterly information.
b. Under common law, Whitlow & Company are liable to return the
money lost due to the embezzlement to the customers and
shareholders. They are liable to these for their customers and
shareholders because they didnt use their money as it was
properly intended and therefore performed an act of crime.
Part Two
a. If Jackson sues under the SEC Act of 1933, the basis of her claim
will be that she wasnt properly informed of the registration and

financial statements. The SEC Act of 1933 states that the only
parties who can recover from auditors are the original purchasers,
which would be Jackson. Jackson can only recover the original
purchase price less the value of the securities at the time of the
suit, however if the securities are sold, users can recover the
amount of loss incurred. So Jackson, can recover $60,000.
b. The probable defenses that that Allen, Dunn, and Rose could
assert in light of these facts are that an adequate audit was
conducted during the time, and that all/portion of the plaintiffs
loss was caused by factors other than the misleading financial
statements. The SEC Act of 1933 is the only common or statuary
law where burden of proof is on the defendant.