A CPA firm has audited the financial statements included in a Form S-1 filed with the SEC under the Securities Act of 1933. Shortly thereafter, the company went bankrupt and a class action lawsuit was filed by the initial investors against the CPA firm.a. What should the plaintiff investors attempt to prove? b. Must the plaintiffs prove that they relied on the financial statements included in the Form S-1? c. What must the CPA firm prove in order to be successful with respect to the firm's defense?
What will be an ideal response?
a. The plaintiff investors should attempt to prove:That they sustained losses, and
That the financial statements were misleading.
b. No. The investors need not prove reliance.
c. The audit firm must prove:"Due diligence" that is, that it had reasonable grounds to believe and did believe that the financial statements were not misleading as of the effective date,
The plaintiffs' losses were not caused by misstated statements, or
The plaintiffs knew of the financial statement misstatement when the securities were purchased.
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