Monicker Co. engaged the audit firm of Gasner & Gasner to audit its financial statements that Monicker was going to use in connection with a public offering of its securities. Monicker's stock regularly trades on the NASDAQ. The audit was completed and the auditor issued an unqualified opinion on the financial statements, which Monicker submitted to the SEC along with the registration statement. Three hundred thousand shares of Monicker common stock were sold to the public at $13.50 per share. Eight months later, the stock fell to $2 per share when it was disclosed that several large loans to two "paper" companies owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporation and by Monicker stock owned by the director. These facts were not disclosed in the financial statements. The director and the two corporations are insolvent. Considering these facts, indicate whether each of the following statements is true or false, and briefly explain the rationale for your choice. The Securities Act of 1933 applies to the preceding public offering of securities. The audit firm has potential liability to any person who acquired the stock described in connection with the public offering. An investor who bought shares in Monicker would make a reasonable case if he or she alleged that the failure to explain the nature of the loans in question constituted a false statement or misleading omission in the financial statements.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter4: Professional Legal Liability

Section: Chapter Questions

Problem 19RQSC

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Monicker Co. engaged the audit firm of Gasner & Gasner to audit its financial statements that Monicker was going to use in connection with a public offering of its securities. Monicker's stock regularly trades on the NASDAQ. The audit was completed and the auditor issued an unqualified opinion on the financial statements, which Monicker submitted to the SEC along with the registration statement. Three hundred thousand shares of Monicker common stock were sold to the public at $13.50 per share. Eight months later, the stock fell to $2 per share when it was disclosed that several large loans to two "paper" companies owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporation and by Monicker stock owned by the director. These facts were not disclosed in the financial statements. The director and the two corporations are insolvent. Considering these facts, indicate whether each of the following statements is true or false, and briefly explain the rationale for your choice.

The Securities Act of 1933 applies to the preceding public offering of securities.
The audit firm has potential liability to any person who acquired the stock described in connection with the public offering.
An investor who bought shares in Monicker would make a reasonable case if he or she alleged that the failure to explain the nature of the loans in question constituted a false statement or misleading omission in the financial statements.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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