Exam 40: Accountants' Liability

Section 552 of the Restatement (Second)of Torts provides a narrower standard for holding accountants liable to third parties for negligence than under the Ultramares doctrine.

The Sarbanes-Oxley Act requires accounting firms that audit public companies to register with the Public Company Accounting Oversight Board,and these accounting firms are subject to inspection and review by the board as follows:

A(n)________ is defined as a verification of a company's books and records.

Constructive fraud is sometimes categorized as gross negligence.

Young and Associates Public Accountants,Inc.is performing an audit for Mackey Corporation.Mike,a member of the accounting firm assigned to conduct the audit,is extremely busy,so he takes the "path of least resistance" in terms of using several shortcuts in the auditing process.Despite the shortcuts,he nevertheless discovers a few discrepancies in Mackey's financial data; however,in his desire to retain Mackey Corporation as a client,Mike ignores the discrepancies and issues an unqualified opinion letter in conjunction with the audit.Had Mike not taken shortcuts,and had Mike fully-investigated the discrepancies,he would have discovered that Alan,a Mackey Corporation vice president,has been embezzling from the company.When the embezzlement is later discovered,the company loses a number of clients,who are unsure of the company's financial stability.What is Young and Associates' liability?

A person injured by a Racketeer Influenced and Corrupt Organizations Act violation can bring a civil action against the violator and recover treble damages,but only if the defendant has already been criminally convicted in connection with the securities fraud.

Common law provides that an accountant may be called to court to testify against his or her client.

An accountant who does not comply with GAASs when conducting an audit and thereby fails to uncover a fraud or embezzlement by an employee of the company being audited can be sued for damages arising from this negligence.

A company that receives an opinion other than an unqualified opinion may not be able to sell its securities to the public,merge with another company,or obtain loans from banks.

The terms of an "engagement" are specified when an accountant and a client enter into a contract.

Most public accounting firms are organized and operated as general partnerships.

A disclaimer of opinion is generally issued when the auditor lacks sufficient information about the financial records to issue an overall opinion.

If a company materially misstates certain items on its financial statements,an accountant conducting an audit of the company should provide which type of opinion?

In terms of the Public Company Accounting Oversight Board (PCAOB),all of its members must be certified public accountants (CPAs).

KMAKY is an accounting firm and has been hired to audit the books for Bike Spinners,Inc.While performing the audit,they find that although the company's financial statement fairly represents the company's position,the accounting methods the client used to arrive at the figures were not generally accepted in the accounting industry.KMAKY should provide the following opinion:

In a limited liability partnership,all of the partners are limited partners who lose only their capital contribution in the LLP if the LLP fails.

________ fraud occurs when an accountant acts with "reckless disregard" for the truth or the consequences of his or her actions.This type of fraud is sometimes categorized as gross negligence.

A majority of states have adopted the foreseeability standard for holding accountants liable to third parties for negligence.

There is no accountant-client privilege under federal law.

Generally accepted accounting principles specify the methods and procedures that must be used to conduct audits.