Reference no: EM132726579

Question - Prestige International contacted the CPA firm of Teitel & Deiana to perform an audit of their financial statements. In arranging for the audit, Prestige International clearly indicated that they were obtaining an audit report to satisfy Marathon Bank as to the corporation's sound financial condition and to obtain an additional loan of $450,000 (it had previously obtained a $300,000 loan). Teitel & Deiana accepted the engagement, performed the examination without due care, and rendered an unqualified opinion. If an adequate examination had been performed, the financial statements would have been found to be misleading and required an adjustment or have a different opinion rendered by the auditor. Prestige International submitted the audited financial statements to Marathon Bank and obtained an additional loan of $450,000. Marathon Bank refused to lend more than that amount after being requested to by Prestige International. After several other banks also refused to loan them money, Prestige International finally was able to persuade The People's Bank to lend the additional $250,000. The People's Bank relied upon the financial statements examined by Teitel & Deiana. Prestige International is now in bankruptcy, and the Marathon Bank seeks to collect from Teitel & Deiana the $750,000 it loaned Prestige International. The People's Bank seeks to recover from Teitel & Deiana the $250,000 it loaned Prestige International.

Required - Will the People's Bank be able to recover from Teitel & Deiana? Explain in detail using the legal liability model.