Auditing and Assurance Services 9th Edition by Alvin Arens,Mark Beasley,Randy Elder

Exercise 27

Cable Corporation orally engaged Drake Company, CPAs, to audit its financial statements. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss.
If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not
A) Have privity of contract with Cable.
B) Sign an engagement letter.
C) Perform the audit recklessly or with an intent to deceive.
D) Violate generally accepted auditing standards in performing the audit.