Items 1 and 2 are based on the following:

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client’s financial statements. Larson’s unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose.

In a suit by a purchaser against Larson for common law negligence, Larson’s best defense would be that the

1. Audit was conducted in accordance with generally accepted auditing standards.
2. Client was aware of the misstatements.
3. Purchaser was not in privity of contract with Larson.
4. Identity of the purchaser was not known to Larson at the time of the audit.

In a suit by a purchaser against Larson for common law fraud, Larson’s best defense would be that

1. Larson did not have actual or constructive knowledge of the misstatements.
2. Larson’s client knew or should have known of the misstatements.
3. Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit.
4. Larson was not in privity of contract with its client.