Multiple Choice Questions
The following questions deal with liability under the 1933 and 1934 securities acts. Choose the best response.
a. Major, Major, & Sharpe, CPAs, are the auditors of MacLain Technologies. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements were revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement that included the financial statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major will be able to avoid liability if
(1) The misstatements were caused primarily by MacLain.
(2) It can be shown that at least some of the investors did not actually read the audited financial statements.
(3) It can prove due diligence in the audit of the financial statements of MacLain.
(4) MacLain had expressly assumed any liability in connection with the public offering.
b. Under the 1933 Securities Act, which of the following must be proven by the purchaser of the security?

c. Donalds & Company, CPAs, audited the financial statements included in the annual report submitted by Markum Securities, Inc. to the SEC. The audit was improper in several respects. Markum is now insolvent and unable to satisfy the claims of its customers. The customers have instituted legal action against Donalds based on Section 10b and Rule 10b-5 of the Securities Exchange Act of 1934. Which of the following is likely to be Donalds' best defense?
(1) They did not intentionally certify false financial statements.
(2) Section 10b does not apply to them.
(3) They were not in privity of contract with the creditors.
(4) Their engagement letter specifically disclaimed any liability to any party that resulted from Markum's fraudulent conduct.
d. Which of the following statements about the Securities Act of 1933 is not true?
(1) The third party user does not have the burden of proof that she/he relied on the financial statements.
(2) The third party has the burden of proof that the auditor was either negligent or fraudulent in doing the audit.
(3) The third party user does not have the burden of proof that the loss was caused by the misleading financial statements.
(4) The auditor will not be liable if he or she can demonstrate due diligence in performing theaudit.

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Reliance on the Financial Statements Fraud by The CPA Yes Yes No No Yes No Yes No