In connection with a public offering of first mortgage bonds by DuMond Corp., the bond
underwriter has asked DuMond's CPA to furnish him with a comfort letter giving as much
assurance as possible relative to DuMond's unaudited financial statements for the three months
ended March 31, 2000.
The CPA had expressed an unqualified opinion on DuMond's financial statements for the year
ended December 31, 1999; he has performed a limited review of DuMond's financial statements
for the three months ended March 31, 2000. Nothing has come to his attention that would
indicate that the March 31, 2000 statements are not properly presented. Under these
circumstances, the CPA's response to the underwriter's request should be to
a.furnish to the underwriters an opinion that the March 31, 2000 statements are fairly presented
subject to year-end audit adjustments.
give negative assurance as to the March 31, 2000 financial statements but disclaim an
opinion on these statements.
c.inform the underwriters that no comfort letter is possible without an audit of the financial
statements for the three months ended March 31, 2000.
Furnish to the underwriters an adverse opinion covering financial statements for the three
months ended March 31, 2000.
As a consequence of his failure to adhere to generally accepted auditing standards in the course
of his examination of the Lamp Corp, Harrison, CPA, did not detect the embezzlement of a
material amount of funds by the company's controller. As a matter of common law, to what
extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft?
a.He would have no liability, since the ordinary examination cannot be relied upon to detect
thefts of assets by employees.
He would have no liability because privity of contract is lacking.
c.He would be liable for losses attributable to his negligence.
He would be liable only if it could be proven that he was grossly negligent.
The King Surety Company wrote a general fidelity bond covering thefts of assets by the
employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled $17,200 of
company funds. When the activities were discovered, King paid Wilson the full amount in
accordance with the terms of the fidelity bond, and then sought recovery against Wilson's
auditors, Lynch & Merritt, CPAs. Which of the following would be Lynch & Merritt's best
a.King is not in privity of contract.
The shortages were the result of clever forgeries and collusive fraud which would not be
detected by an examination made in accordance with generally accepted auditing standards.