Items 1 and 2 are based on the following:
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 for common law negligence, Larson’s best defense would be that the
- Audit was conducted in accordance with generally accepted auditing standards.
- Client was aware of the misstatements.
- Purchaser was not in privity of contract with Larson.
- Identity of the purchaser was not known to Larson at the time of the audit.
In a suit by a purchaser against Larson for common law fraud, Larson’s best defense would be that
- Larson did not have actual or constructive knowledge of the misstatements.
- Larson’s client knew or should have known of the misstatements.
- Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit.
- Larson was not in privity of contract with its client.