While Conducting an Audit,Larson Associates,CPAs,failed to Detect Material Misstatements Included

question 45

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 a suit by a purchaser against Larson,its best defense would be that the

• A) Audit was conducted in accordance with generally accepted auditing standards.
• B) Client was aware of the misstatements.
• C) Purchaser was not in privity of contract with Larson.
• D) Larson did not know the identity of the purchaser at the time of the audit.

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Definitions:

Depreciation Tax Deduction

A tax deduction allowing businesses to write off the loss of value of tangible assets over their useful lives, reducing taxable income.

Interest Tax Shield

The savings in taxes achieved by deducting interest payments on debt from taxable income.

Financial Risk

The possibility of losing money on an investment or business venture, usually due to changes in market conditions or poor financial management.

Levered Firms

Companies that use debt in addition to equity in their capital structure.