The Monicker Co. engaged the audit firm of Gasner & Gasner to audit the financial statements to be used in connection with a public offering of securities. Monicker’s stock is regularly traded on the NASDAQ. The audit was completed and an unqualified opinion was expressed on the financial statements, which were 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.

a. The Securities Act of 1933 applies to the preceding public offering of securities.

b. The audit firm has potential liability to any person who acquired the stock described in connection with the public offering.

c. 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.

d. The auditors could avoid liability if they could show that they were not fraudulent in the conduct of the audit.

e. The auditors could avoid or reduce the damages asserted against them if they could establish that the drop in price was due in whole or in part to other causes.

f. The SEC would establish contributory negligence as a partial defense for the auditor because the SEC approved the registration statement.