Question

Financial statements are prepared following a(an)

A		Appropriate subject matter.
B		Generally accepted auditing standards.
C		Set of quality control standards.
D		Applicable financial reporting framework.

Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements?

	A	A disclaimer contained in the engagement letter.
	B	Contributory negligence on the part of the client.
	C	Lack of due diligence.
	D	Due professional care.

Answer 1

Requirement 1

D. Applicable financial reporting framework.

Applicable financial reporting framework are set of guidelines for the preparation of financial statements. The applicable framework depends on the location of entity as well as the nature and size of business. For example, for businesses located in US, the applicable framework for preparation of financial statements would be Generally accepted accounting principles. Hence, correct option is D.

Requirement 2

D. Due professional care.

The CPA shall try to plan and perform audit with professional care. The CPA can although be never sure that fraud has not happened because of concealed nature of fraud in itself. When the financial statements are misstated, the opinion has to be qualified and never unqualified. This means there is serious lapses. Hence, the best defense against this would be argue for due professional care in audit performance.

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