Reference no: EM133123257

Question - Ontario Automotive Parts Inc. (OAPI), a closely held private manufacturer of car parts, sought a loan from the Bank of Montreal (BMO). BMO had previously extended $50,000 credit to OAPI but refused to lend any additional money without obtaining copies of OAPI's audited financial statements.

OAPI contacted the CPA firm of Jones & Yarmolinsky to perform the audit. In arranging for the audit, OAPI clearly indicated that its purpose was to satisfy the Bank as to the corporation's sound financial condition and to obtain an additional loan of $75,000. Jones & Yarmolinsky accepted the engagement, performed the audit in a negligent manner, and rendered an unqualified opinion. If the audit would have been conducted according to Canadian Auditing Standards the financial statements would have been found to contain a material misstatement and be misleading.

OAPI submitted the audited financial statements to BMO and obtained an additional loan of $40,000. BMO refused to lend more than that amount. As a result OAPI took the audited financial statements to the Royal Bank who agreed to loan the company $35,000.

OAPI is now in bankruptcy, and BMO seeks to collect from Jones & Yarmolinsky the $90,000 it loaned to OAPI The Royal Bank is also seeking to collect from Jones & Yarmolinsky the $35,000 it loaned to OAPI.

Required -

A) Will BMO succeed in a law suit against Jones & Yarmolinsky for the $90,000? If so what must they prove? Fully explain your answer.

b) Will the Royal Bank succeed in a law suit against Jones & Yarmolinsky for the $35,000? Provide an explanation to your response.