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. Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under Section 11 of the Securities Act of 1933?

Question

Quizplus · Accepted Answer

Under Section 11 of the Securities Act of 1933, auditors (like Larson Associates) can be held liable for material misstatements in financial statements included in a registration statement, unless they can demonstrate that they had reasonable grounds to believe and did believe, at the time the registration statement became effective, that the statements were accurate based on their audit work. This provision shifts the burden of proof to the auditors to show due diligence in their audit work, rather than requiring the purchaser to prove negligence or knowledge of the misstatements by the auditors.

While Conducting an Audit, Larson Associates, CPAs, Failed to Detect