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ACC 544 Quiz 2
• 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