[The following information applies to the questions displayed below Paul Lewis is the quality review partner on the Richards & Co, engagement. He was reviewing the workpapers prior to the December 31, 2015 annual audit when he came across transactions that caused him a great deal of concern. He wondered if the firm's auditors had handled them properly. The following information appeared in a memo to the file that prompted his concern. Memo to File: Supplier Credits for Returned Product For the last three quarters of the year, Richards has engaged in last-minute transactions that are questionable. The facts are, according to the client, that Richards received credits from a cellular phone supplier and promised to repay the supplier by purchasing cellular telephone and repair services et inflated prices in the subsequent quarter. The client has been unable to produce any supporting documents with respect to the promised purchases, and we have not been able to trace any such payments to cash disbursements The clilent has produced credit memos in the amount of $10 million, $7 million, and $4 million for December 31, 2015, September 30, 2015, and June 30, 2015, respectively, which is about 15 percent of the reported net income for 2015. The memos are marked to indicate that the credit was being provided in connection with defective telephone components. However, we could not identify any shipping documents to confirm that the components were returned to the supplier. Exhibit 1 shows the reported net income amounts by quarter and what they would have been without the credits. Exhibit 1 Net Income Amounts Querters for 2015 March 31 $36 million September 30 December 31 $33 milion $26 million $7 million 26.9% June 30 Reported net income $32 million $28 milion $ 4 million $34 milion $24 million Net income w/o credits $36 million Difference $ 10 million Percentage 14.3% 417 % We have filed 10-Q quarterly reports to the SEC based on the reported net income We recommend, however, the firm conduct due diligence prior to publishing the 10-K annual report The client assures us that the promised purchases will be made and the only reason for not doing so is a cash flow problem. We are relying on management's representations in that regard Richards is currently negotiating a loan for $20 million Richards has filed quarterly reports to the SEC based on information supplied by management. A potential concern of such reliance is which of the following? Privity only Liability to 3rd parties Liability to foreseen 3rd parties only Liability to reasonably foreseen 3rd parties only