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• Question 1 Mead Corp. orally engaged Dex & Co., CPAs, to audit
its financial statements. The management of Mead informed Dex that
it suspected that the accounts receivable were materially overstated.
Although the financial statements audited by Dex did, in fact, include
a materially overstated accounts receivable balance, Dex issued an
unqualified opinion. Mead relied on the financial statements in
deciding to obtain a loan from City Bank to expand its operations. City
relied on the financial statements in making the loan to Mead. As a
result of the overstated accounts receivable balance, Mead has
defaulted on the loan and has incurred a substantial loss. If Mead sues
Dex for negligence in failing to discover the overstatement, Dex’s best
defense would be that
• Question 2 Doe and Co., CPAs, issued an unqualified opinion on
the 2012 financial statements of Marx Corp. These financial
statements were included in Marx’s annual report and Form 10K filed
with the SEC. Doe did not detect material misstatements in the
financial statements as a result of negligence in the performance of
the audit. Based upon the financial statements, Fitch purchased stock
in Marx. Shortly thereafter, Marx became insolvent, causing the price
of the stock to decline drastically. Fitch has commenced legal action
against Doe for damages based upon Section 10(b) and Rule 10b-5 of
the Securities Exchange Act of 1934. Doe’s best defense to such an
action would be that
• Question 3 A CPA firm was negligent in the audit of financial
statements contained in a Form 10-K filed with the SEC. If an injured
third party decided to file suit against the CPA, it would most likely be
filed under
• Question 4 Dexter and Co., CPAs, issued an unqualified opinion
on the 2012 financial statements of Bart Corp. Late in 2010, Bart
determined that its treasurer had embezzled over $1,000,000. Dexter
was unaware of the embezzlement. Bart has decided to sue Dexter to
recover the $1,000,000. Bart’s suit is based upon Dexter’s failure to
discover the missing money while performing the audit. Which of the
following is Dexter’s best defense?