Nast CorpOrally Engaged Baker & Co

question 37

Multiple Choice

Nast Corp.orally engaged Baker & Co. ,CPAs,to audit its financial statements.The management of Nast informed Baker that it suspected the accounts receivable were materially overstated.Although the financial statements audited by Baker did,in fact,include a materially overstated accounts receivable balance,Baker issued an unqualified opinion.Nast relied on the financial statements in deciding to obtain a loan from Century Bank to expand its operations.Nast has defaulted on the loan and has incurred a substantial loss.If Nast sues Baker for negligence in failing to discover the overstatement,Baker's best defense would be that:

• A) Baker did not perform the audit recklessly or with an intent to deceive.
• B) Baker was not in privity of contract with Nast.
• C) Baker performed the audit in accordance with generally accepted auditing standards.
• D) Nast orally engaged Baker and no engagement letter had been signed by Baker.

---

Definitions:

Noncash Assets

Assets that are not in the form of cash or easily convertible into cash, such as property, plant, and equipment.

Total Capital

The sum of a company's debt and equity, representing the total funds available for the business to use.

Partners' Equity

The owners' claim or interest in the assets of a partnership, after all liabilities have been subtracted.

Capital Account

An account used in economics and finance to track the net changes in a nation's assets and liabilities or a company's equity provided by shareholders and retained earnings.