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Question
Nast Corp. orally engaged Baker & Co., CPAs, to audit its financial statements. The management of Nast informed Baker that it suspected the accounts receivable were materially overstated. Although the financial statements audited by Baker did, in fact, include a materially overstated accounts receivable balance, Baker issued an unqualified opinion. Nast relied on the financial statements in deciding to obtain a loan from Century Bank to expand its operations. Nast has defaulted on the loan and has incurred a substantial loss. If Nast sues Baker for negligence in failing to discover the overstatement, Baker's best defense would be that:
A. Baker did not perform the audit recklessly or with an intent to deceive.
B. Baker was not in privity of contract with Nast.
C. Baker performed the audit in accordance with generally accepted auditing standards.
D. Nast orally engaged Baker and no engagement letter had been signed by Baker.
Answer
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