While Conducting an Audit, Larson & Larson Chartered Professional Accountants

question 3

Multiple Choice

While conducting an audit, Larson & Larson Chartered Professional Accountants failed to detect a material misstatement in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a 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?

• 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 they had reasonable grounds to believe the financial statements were accurate.
• D) Larson will be liable unless the purchaser did not rely on the financial statements.

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Definitions:

Dividends

Funds disbursed by a company to its shareholders, representing a share of the profits earned by the company.

Total Liabilities

The sum of all financial obligations a company owes to outside parties.

Expenses

Costs incurred by a business in the process of earning revenue, including operational costs, salaries, and utilities.

Retained Earnings

Part of a company's profit that is held or retained and saved for future use, reinvestment, or to pay debt rather than being paid out as dividends to shareholders.