Question

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unmodified 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 true 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?

A. The purchaser must prove that Larson was negligent in conducting the audit.
B. The purchaser must prove that Larson knew of the material misstatements.
C. Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate.
D. Larson will be liable unless the purchaser did not rely on the financial statements.

Answer 1

C. Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate.

Step-by-step explanation:

Under the Section 11 of the Securities Act of 1933, Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate.

Section 11 of the Securities Act of 1933 , 15 U.S.C. § 77k (1988), provides investors with the ability to hold issuers and others liable for any damage incurred and caused by false statements of fact or even material omissions of fact within registration statements as at when effective.

The Securities Act of 1933 which was used to regulate the stock market as the first federal legislation. With this act, power was given to the federal government and taken away from the state governments. The Securities Act of 1933 is used to protect investors from frauds by creating a set of standard rules.