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On August 21, 2017, Comfi Beds and Furniture, Inc. planned to purchase Sleep Ezy Corporation, and hired the accounting firm of Loosy and Goosy LLP, to review the audit that had been prepared by Billy Bob and Brothers, CPAs, the accountant for Sleep Ezy, as of the fiscal year-end July 31, 2017. Loosy and Goosy advised Comfi Beds that Billy Bob had performed a high-quality audit and that Sleep Ezys inventory was stated fairly on the general ledger and balance sheet as of the audit date. As a result of these representations, Comfi Beds went forward with the purchase of Sleep Ezy. Several months after the purchase, Comfi Beds discovered that the audit by Billy Bob had been materially inaccurate and misleading, primarily because the inventory had been grossly overstated on the balance sheet. Subsequent to the discovery, a former Sleep Ezy employee who had begun working for Comfi Beds exposed an e-mail exchange between Billy Bob and the former CEO of Sleep Ezy. The exchange revealed that Billy Bob had cooperated in overstating the inventory on the books of Sleep Ezy.

Questions

1. If Loosy and Goosys review was conducted in good faith and conformed to GAAP, could Comfi Beds hold Loosy and Goosy liable for negligently failing to detect the inventory overstatement in Billy Bobs audit? Why or why not?

2. Review the various principles discussed in the chapter that have been adopted by the courts and the accountants legal liability. Based on your review and analysis, could Billy Bob have been liable to Comfi Beds?

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