26. West & Company, CPAs, was engaged by Sand Corporation to audit its financial statements. West issued an unqualified opinion on Sand's financial statements. Sand has been accused of making negligent misrepresentations in the financial statements that Reed relied upon when purchasing Sand's stock. West was not aware of the misrepresentations and was not negligent in performing the audit. If Reed sues West for damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, West will:
    1. prevail, because some element of scienter must be proved.
    2. lose, because the statements contained negligent misrepresentations.
    3. lose, because Reed relied upon the financial statements.
    4. prevail, because Reed was not in privity of contract with West.

27. Which of the following material events occurring subsequent to the balance sheet date would require an adjustment (i.e., an adjusting journal entry) to the financial statements before they could be issued?
    1. Settlement of litigation, in excess of the previously recorded liability.
    2. Sale of long-term debt or capital stock.
    3. Loss of a plant as a result of a flood.
    4. Major purchase of a business that is expected to double sales volume.

28. Which of the following is allowable for a CPA?
    1. A credit card from a banking client with a balance below $10,000.
    2. An uncollateralized loan from a client.
    3. Owning more than 5% of the outstanding shares of client stock in a retirement account.
    4. The audit engagement partner serves on the client's audit committee.

29. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should:
    1. honor the confidentiality of the client-lawyer relationship.
    2. seek to obtain the corroborating information from management.
    3. disclose this fact in a footnote to the financial statements.
    4. consider the refusal to be a scope limitation.

30. When evaluating the impact of misstatements on the financial statements, auditors must use both the rollover and iron curtain approaches. Regarding these approaches, which of the following statements is correct:
    1. The rollover approach quantifies the impact of current year and prior year misstatements on the balance sheet.
    2. The iron curtain approach quantifies the impact of current year misstatements on the income statement.
    3. The rollover approach quantifies the impact of current year misstatements on the balance sheet.
    4. The iron curtain approach quantifies the impact of current year and prior misstatements on the balance sheet.