While Conducting an Audit, Larson Associates, CPAs, Failed to Detect

question 57

Multiple Choice

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In suit by a purchaser against Larson for common-law fraud, Larson's best defense would be that:

• A)Larson did not have actual or constructive knowledge of the misstatements and the auditor followed PCAOB Auditing Standards in the audit.
• B)Larson's client knew or should have known of the misstatements.
• C)Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit.
• D)Larson was not in privity of contract with its client.

---

Definitions:

Wage and Salary Administration

The process of organizing and managing employee compensation based on job roles, experience, and performance.

Pay Inversion

A situation where a more junior employee ends up making more money than their more senior counterparts, often due to market rate changes or hiring practices.

Pay Compression

A situation where there is only a small difference in pay between employees regardless of their skills, experience, or seniority.

Defined Contribution Plan

A retirement plan in which the amount of the employer's annual contribution is specified.