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

question 59

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. Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under Section 11 of the Securities Act of 1933?

• A)The purchaser must prove that Larson was negligent in conducting the audit.
• B)The purchaser must prove that Larson knew of the material misstatements.
• C)Larson will not be liable if it had reasonable grounds, based on work performed, to believe the financial statements were accurate.
• D)Larson will be liable unless the purchaser did not rely on the financial statements.

Understand the impact of fair value adjustments on the financial statements.

Identify and apply the equity method of accounting for investments that provide significant influence but not control.

Understand the accounting for investments in bonds and the impact of purchasing bonds at par, discount, or premium.

Analyze the financial statement impacts of changes in the fair value of investments.

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Definitions:

Consolidate

To combine multiple elements into a single, more effective or coherent whole, often used in the context of financial statements or businesses.

Statement of Dissolution

A legal document filed with a government body to officially dissolve a corporation or partnership.

LLP

Limited Liability Partnership, a legal structure for businesses where partners have limited liabilities, protecting personal assets from business debts.

Creditor

An individual or institution to whom money is owed by a debtor.