Choice "C" is correct. A CPA will be liable in negligence if he or she fails to exercise the care and prudence that an ordinary CPA would exercise in performing an audit. An ordinary CPA would normally adhere to GAAS. Thus, proof of adherence to GAAS may prevent liability.
Choice "d" is incorrect. A CPA must perform an audit with the care and skill that an ordinary CPA would exercise; exercising the care and skill of an ordinary, reasonable person is not enough.
Choice "b" is incorrect. A CPA may be liable for punitive damages for willful fraud or recklessly performing an audit. While failure to exercise due care is a sufficient basis to impose liability for negligence, it is not a sufficient basis to impose liability for fraud.
Choice "a" is incorrect. This choice sets up a strict liability standard – CPAs are liable for any embezzlement losses that should have been detected. The law imposes no such liability. A CPA must at least be negligent before liability will be imposed.