The balance sheet in question was misstated by approximately $800,000. Instead of having a $600,000 net worth, the corporation was insolvent. The management of Regal Jewelry had doctored the books to avoid bankruptcy. The assets had been overstated by $500,000 of fictitious and nonexisting accounts receivable and $300,000 of nonexisting jewelry listed as inventory when in fact Regal Jewelry had only empty boxes. The audit failed to detect these fraudulent entries. Thompson, relying on the audited financial statements, loaned Regal Jewelry $200,000. She seeks to recover her loss from Doyle and Jensen. State whether each of the following is true or false and give your reasons: (Assume a conservative interpretation of the legal relationship between auditors and third parties.) True. If negligence is proven, the CPA firm can and probably will be held liable for losses to third parties. False. There was no privity of contract between Thomson and the CPA. Ordinary negligence will not be sufficient for a recovery. (2) True. If gross negligence is proven, the CPA firm can and probably will be held liable for losses to third parties. False. There was no privity of contract between Thomson and the CPA. Gross negligence will not be sufficient for a recovery. (3) True. Actual fraud on Doyle and Jensen's part must be shown in order for Thompson to recover. False. Constructive fraud is treated as actual fraud in determining who may recover from the CPA. (4) True. As a potential lender and user of the financial statements, Thompson is a 3rd party beneficiary of the contract. False. Thompson is an unknown 3rd party and will likely be able to recover damages only in the case of gross negligence or fraud. Doyle and Jensen, CPAs, audited the accounts of Regal Jewelry, Inc., a corporation that imports and deals in fine jewelry. Upon completion of the audit, the auditors supplied Regal Jewelry with 20 copies of the audited financial statements. The firm knew in a general way that Regal Jewelry wanted that number of copies of the auditor's report to furnish to banks and other potential lenders