Question 1

The Ultramares doctrine is the majority rule for accountants' liability for negligence in the United States.

Accepted Answer

A) True 
 B)False

Question 2

Third parties usually cannot sue accountants for breach of contract,because the third parties are merely incidental beneficiaries who do not acquire any rights under the accountant-client contract.

Accepted Answer

A) True 
 B)False

Question 3

The Public Company Accounting Oversight Board was created by:

Accepted Answer

A)  the Securities Exchange Act of 1933. 
B)  the Securities Exchange Act of 1934. 
C)  the Private Securities Litigation Reform Act of 1995. 
D)  the Tax Reform Act of 1976. 
E)  the Sarbanes Oxley Act of 2002. 
A)  the Securities Exchange Act of 1933. 
B)  the Securities Exchange Act of 1934. 
C)  the Private Securities Litigation Reform Act of 1995. 
D)  the Tax Reform Act of 1976. 
E)  the Sarbanes Oxley Act of 2002.

Question 4

An adverse opinion determines that the company's financial statements do not fairly represent the company's financial position,results of operations,or change in cash flows in conformity with GAAPs.

Accepted Answer

A) True 
 B)False

Question 5

An accountant's failure to follow generally accepted auditing standards when performing an audit constitutes:

Accepted Answer

A)  civil fraud. 
B)  civil misrepresentation. 
C)  negligence. 
D)  civil deceit. 
E)  no-fault liability. 
A)  civil fraud. 
B)  civil misrepresentation. 
C)  negligence. 
D)  civil deceit. 
E)  no-fault liability.

Question 6

Sterling and Company,LLP,has just established its business as the newest accounting firm in town.There are eight general partners and a number of new graduates hired as associates.They intend to specialize in audits of public companies.Which of the following is not correct with regard to how Sterling and Company,LLP needs to conduct its business?

Accepted Answer

A)  It must register with the Public Company Accounting Oversight Board. 
B)  It must retain all audit papers for a period of at least ten years. 
C)  It must be sure to have a second partner review and approve audit reports prepared by the firm. 
D)  It must assure that the auditors revolve off the audits every five years. 
E)  It must refrain from providing any non-audit services to its clients other than tax preparation. 
A)  It must register with the Public Company Accounting Oversight Board. 
B)  It must retain all audit papers for a period of at least ten years. 
C)  It must be sure to have a second partner review and approve audit reports prepared by the firm. 
D)  It must assure that the auditors revolve off the audits every five years. 
E)  It must refrain from providing any non-audit services to its clients other than tax preparation.

Question 7

The landmark case that initially defined the liability of accountants to third parties was Supramares Corporation v.Goldman Sachs.

Accepted Answer

A) True 
 B)False

Question 8

Under Section 552 of the Restatement (Second)of Torts,an accountant is liable for his or her negligence to any member of a limited class of intended users for whose benefit the accountant has been employed to prepare the client's financial statements or to whom the accountant knows the client will supply copies of the financial statements.

Accepted Answer

A) True 
 B)False

Question 9

A violation of generally accepted accounting principles or generally accepted auditing standards is prima facie evidence of negligence.

Accepted Answer

A) True 
 B)False

Question 10

Either privity of contract or a privity-like relationship is required to hold an accountant liable for negligence to a third party under the "foreseeability" rule.

Accepted Answer

A) True 
 B)False

Question 11

The accountant's duty of care to avoid negligence is determined by which of the following standards?

Accepted Answer

A)  a reasonable accountant 
B)  a reasonable person 
C)  a reasonable professional 
D)  a reasonable man or a reasonable woman 
E)  a reasonable expert 
A)  a reasonable accountant 
B)  a reasonable person 
C)  a reasonable professional 
D)  a reasonable man or a reasonable woman 
E)  a reasonable expert

Question 12

Certified public accountants must comply with generally accepted accounting principles.

Accepted Answer

A) True 
 B)False

Question 13

The majority of litigation against accountants results from:

Accepted Answer

A)  tax preparation. 
B)  the preparation of opinion letters. 
C)  the preparation of financial statements. 
D)  the preparation of audits. 
E)  the preparation of balance sheets. 
A)  tax preparation. 
B)  the preparation of opinion letters. 
C)  the preparation of financial statements. 
D)  the preparation of audits. 
E)  the preparation of balance sheets.

Question 14

The most favorable opinion that an accountant can give is (a)n:

Accepted Answer

A)  qualified opinion. 
B)  unqualified opinion. 
C)  adverse opinion. 
D)  disclaimed opinion. 
E)  sanctioned opinion. 
A)  qualified opinion. 
B)  unqualified opinion. 
C)  adverse opinion. 
D)  disclaimed opinion. 
E)  sanctioned opinion.

Question 15

Truth Accounting,Inc.has been retained to perform an audit for a client.In doing the Audit,it fails to discover an embezzlement that has gone on for two years by the client's chief financial officer.The reason that Truth Accounting,Inc.failed to discover the embezzlement was because the auditor was in a rush to finish due to being too busy,so she did not conduct a reasonable investigation.Soon after the audit,the embezzlement is discovered,and the client goes bankrupt.If Truth Accounting,Inc.is sued,which of the following theories of liability apply?

Accepted Answer

A)  the Ultramares doctrine 
B)  Section 552 of the Restatement (Second) of Torts 
C)  negligence 
D)  the foreseeability standard 
E)  strict liability 
A)  the Ultramares doctrine 
B)  Section 552 of the Restatement (Second) of Torts 
C)  negligence 
D)  the foreseeability standard 
E)  strict liability

Question 16

An auditor must conduct a sampling of inventory to verify the figures contained in a client's financial statements.

Accepted Answer

A) True 
 B)False

Question 17

The term "GAASs" stands for "generally accepted accounting standards."

Accepted Answer

A) True 
 B)False

Question 18

Certified public accountants must comply with generally accepted auditing standards.

Accepted Answer

A) True 
 B)False

Question 19

Certified public accountants must comply with two (2)uniform standards of professional conduct.They are ________,which are standards for the preparation and presentation of financial statements,and ________,which specify the methods and procedures that must be used to conduct audits.

Accepted Answer

A)  BAAPs; BAASs 
B)  CAAPs; CAASs 
C)  DAAPs; DAASs 
D)  GAAPs; GAASs 
E)  MAAPs; MAASs 
A)  BAAPs; BAASs 
B)  CAAPs; CAASs 
C)  DAAPs; DAASs 
D)  GAAPs; GAASs 
E)  MAAPs; MAASs

Question 20

The Ultramares doctrine,as created by Justice Cardozo in Ultramares Corporation v.Touche,states that:

Accepted Answer

A)  a third party may hold an accountant liable for negligence, but only if they have a direct contractual relationship with the accountant and/or the accounting firm. 
B)  a third party may hold an accountant liable for negligence when the accountant prepares a client audit he or she knows is specifically intended for use by the third party. 
C)  a third party may hold an accountant liable for negligence when the accountant prepares an audit for his or her client, regardless of whether the accountant knows the audit is specifically intended for use by the third party. 
D)  a third party may hold an accountant liable for negligence, but only if the engagement agreement with the client contains a general release stating that the client may use the audit for whatever purposes the client wishes. 
E)  contractual relationships and knowledge of use or intended use are irrelevant issues, because an accountant and/or accounting firm, as professionals, will be liable for any damages caused by their negligence, whether foreseeable or not. 
A)  a third party may hold an accountant liable for negligence, but only if they have a direct contractual relationship with the accountant and/or the accounting firm. 
B)  a third party may hold an accountant liable for negligence when the accountant prepares a client audit he or she knows is specifically intended for use by the third party. 
C)  a third party may hold an accountant liable for negligence when the accountant prepares an audit for his or her client, regardless of whether the accountant knows the audit is specifically intended for use by the third party. 
D)  a third party may hold an accountant liable for negligence, but only if the engagement agreement with the client contains a general release stating that the client may use the audit for whatever purposes the client wishes. 
E)  contractual relationships and knowledge of use or intended use are irrelevant issues, because an accountant and/or accounting firm, as professionals, will be liable for any damages caused by their negligence, whether foreseeable or not.

Exam 40: Accountants' Liability

The Ultramares doctrine is the majority rule for accountants' liability for negligence in the United States.

Third parties usually cannot sue accountants for breach of contract,because the third parties are merely incidental beneficiaries who do not acquire any rights under the accountant-client contract.

The Public Company Accounting Oversight Board was created by:

An adverse opinion determines that the company's financial statements do not fairly represent the company's financial position,results of operations,or change in cash flows in conformity with GAAPs.

An accountant's failure to follow generally accepted auditing standards when performing an audit constitutes:

The landmark case that initially defined the liability of accountants to third parties was Supramares Corporation v.Goldman Sachs.

A violation of generally accepted accounting principles or generally accepted auditing standards is prima facie evidence of negligence.

Either privity of contract or a privity-like relationship is required to hold an accountant liable for negligence to a third party under the "foreseeability" rule.

The accountant's duty of care to avoid negligence is determined by which of the following standards?

Certified public accountants must comply with generally accepted accounting principles.

The majority of litigation against accountants results from:

The most favorable opinion that an accountant can give is (a)n:

An auditor must conduct a sampling of inventory to verify the figures contained in a client's financial statements.

The term "GAASs" stands for "generally accepted accounting standards."

Certified public accountants must comply with generally accepted auditing standards.

Certified public accountants must comply with two (2)uniform standards of professional conduct.They are ________,which are standards for the preparation and presentation of financial statements,and ________,which specify the methods and procedures that must be used to conduct audits.

The Ultramares doctrine,as created by Justice Cardozo in Ultramares Corporation v.Touche,states that:

Legal Heritage and the Information Age

Constitutional Law for Business and E-Commerce

Courts and Jurisdiction

Judicial, Alternative, Administrative, and E-Dispute Resolution

Torts and Strict Liability

Criminal Law and Cyber Crimes

Intellectual Property and Cyber Piracy

Ethics and Social Responsibility of Business

Nature of Traditional and E-Contracts

Agreement and Consideration

Capacity and Legality

Genuineness of Assent and Statute of Frauds

Third-Party Rights and Discharge

Breach of Contract and Remedies

Digital Law and E-Commerce

Formation of Sales, Lease, and E-Contracts

Performance of Sales, Leases and E-Contracts

Remedies for Breach of Sales and Lease Contracts

Warranties and Product Liability

Creation and Transfer of Negotiable Instruments

Holder in Due Course and Liability of Parties

Banking System, E-Money, and Financial Reform

Credit and Secured Transactions

Bankruptcy and Reorganization

Agency Law

Small Business, Entrepreneurship, and Partnerships

Corporate Formation and Financing

Corporate Governance and Sarbanes-Oxley Act

Corporate Acquisitions and Multinational Corporations

Limited Liability Company and Limited Liability Partnership

Franchise and Special Forms of Business

Investor Protection,E-Securities Transactions,and Wall Street Reform

Antitrust Law

Consumer Safety, Consumer Financial Protection, and Environmental Protection

Labor, Worker Protection, Employment, and Immigration Law

Equal Opportunity in Employment

Personal Property, Bailment, and Insurance

Real Property, Landlord-Tenant Law, and Land Use Regulation

Family Law, Wills, and Trusts

International and World Trade Law

Filters

Certified public accountants must comply with two (2)uniform standards of professional conduct.They are ,which are standards for the preparation and presentation of financial statements,and ,which specify the methods and procedures that must be used to conduct audits.