Bristol Steel Corporation (BSC) manufactures steel products. In 2016, the treasurer of HHH invested excess funds into a speculative stock with the intention of liquidating the stock at some time in the future when the funds were required. The amount is material. After two months, the stock incurred a significant loss and was sold shortly thereafter. The controller prepared a journal entry to record the transaction as a sale of old inventory so the company showed a lower profit on sales than usual, but no trading loss.
The auditor provided an unmodified opinion on the 2016 financial statements. In 2017, the shares of the company were purchased by a private equity firm. The error was discovered after the audited financial statements were issued.
Assume that the private equity form sued the auditors. Explain how the 4 elements of negligence would apply to this case.