Question 1

In the Advanced Battery Technologies case, the opinion of the court:

Accepted Answer

A)  Held the auditors legally liable because they failed to exercise due care and to demonstrate professional skepticism 
B)  Held the auditors legally liable because they failed to gather sufficient, competent evidential matter to warrant the expression of an opinion 
C)  Held the auditors not legally liable because the plaintiff could not plead with particularity that the audit work was so deficient as to amount to no audit at all 
D)  Held the auditors were not legally liable because they met all professional standards 
A)  Held the auditors legally liable because they failed to exercise due care and to demonstrate professional skepticism 
B)  Held the auditors legally liable because they failed to gather sufficient, competent evidential matter to warrant the expression of an opinion 
C)  Held the auditors not legally liable because the plaintiff could not plead with particularity that the audit work was so deficient as to amount to no audit at all 
D)  Held the auditors were not legally liable because they met all professional standards

Question 2

The U.S. Supreme Court ruled in State Street v. Ernst that:

Accepted Answer

A)  The court may "construct" fraud based on gross negligence of the auditor. 
B)  The auditor engaged in an act in connection with the purchase or sale of a security that caused the loss to the plaintiff 
C)  Breach of duty is not required to establish fraud 
D)  The auditor has no legal liability for fraud to third parties 
A)  The court may "construct" fraud based on gross negligence of the auditor. 
B)  The auditor engaged in an act in connection with the purchase or sale of a security that caused the loss to the plaintiff 
C)  Breach of duty is not required to establish fraud 
D)  The auditor has no legal liability for fraud to third parties

Question 3

What is a worrisome consequence under the joint and several liability principle?

Accepted Answer

A)  Each negligent party is liable for the portion of the damages for which it is responsible 
B)  All negligent parties are always liable for damages 
C)  Only the negligent party considered to have "deep pockets" is held liable for damages 
D)  Each negligent party could be held liable for the total of damages suffered 
A)  Each negligent party is liable for the portion of the damages for which it is responsible 
B)  All negligent parties are always liable for damages 
C)  Only the negligent party considered to have "deep pockets" is held liable for damages 
D)  Each negligent party could be held liable for the total of damages suffered

Question 4

Which of the following is NOT one of the defenses an auditor can use against third party lawsuits for fraud?

Accepted Answer

A)  The third party was not in contractual privity 
B)  The auditor did not have a duty to the third party 
C)  The third party was negligent 
D)  The third party did not suffer a loss 
A)  The third party was not in contractual privity 
B)  The auditor did not have a duty to the third party 
C)  The third party was negligent 
D)  The third party did not suffer a loss

Question 5

What argument can be made that SOX may not be effective in reducing fraud?

Accepted Answer

A)  It is not as stringent as international standards 
B)  The SEC has many laws for many years that have not seemed to make much of a difference 
C)  The penalties under Sarbanes-Oxley are especially stringent, so it may not be enforced 
D)  Civil and criminal penalties are not effective in preventing financial fraud 
A)  It is not as stringent as international standards 
B)  The SEC has many laws for many years that have not seemed to make much of a difference 
C)  The penalties under Sarbanes-Oxley are especially stringent, so it may not be enforced 
D)  Civil and criminal penalties are not effective in preventing financial fraud

Question 6

The Restatement (Second) of Torts Approach:

Accepted Answer

A)  Expands an accountant's legal liability to third parties identified by the client as intended recipients of work 
B)  Limits an accountant's legal liability to only those parties with which it has a privity relationship 
C)  Limits an accountant's legal liability to only those parties that have been named by the client 
D)  Expands an accountant's legal liability to all possible users of the audited financial statements 
A)  Expands an accountant's legal liability to third parties identified by the client as intended recipients of work 
B)  Limits an accountant's legal liability to only those parties with which it has a privity relationship 
C)  Limits an accountant's legal liability to only those parties that have been named by the client 
D)  Expands an accountant's legal liability to all possible users of the audited financial statements

Question 7

Describe the steps auditors should take to protect themselves against allegations that fraud went undetected during the audit.

Accepted Answer

The role of the external auditor is to p

Question 8

The following clause was included in the engagement letter between Limits and Lobits, CPAs (L&L) and Fair, Inc., an audit client of (L&L).
Fair, Inc. agrees to release, indemnify, and hold Limits & Lobits, CPAs (its partners, heirs, executors, personal representatives, successors, and assigns) harmless from any liability and costs resulting from fraud caused by or participated in by management of Fair, Inc.
Do you think such a clause is ethical? Use ethical reasoning to support your answer with reference to professional standards.

Accepted Answer

With the continuing focus on management

Question 9

The name of the term used to describe issues that are important enough to merit attention from those responsible for oversight over financial reporting is commonly called:

Accepted Answer

A)  Significant deficiency 
B)  Recklessness 
C)  Material weakness 
D)  Negligence 
A)  Significant deficiency 
B)  Recklessness 
C)  Material weakness 
D)  Negligence

Question 10

A privity relationship means that:

Accepted Answer

A)  A party may be a user of the financial statements 
B)  A party may sue if fraud has taken place 
C)  A party's financial liability is limited 
D)  A party has a contractual obligation 
A)  A party may be a user of the financial statements 
B)  A party may sue if fraud has taken place 
C)  A party's financial liability is limited 
D)  A party has a contractual obligation

Question 11

In the Vertical Pharmaceuticals case, Deloitte & Touche was sued because:

Accepted Answer

A)  Vertical claimed the firm's false accusations of fraudulent conduct led to the withdrawal of another public company's planned acquisition of Vertical 
B)  Deloitte failed to issue an audit report on a timely basis thereby leading to the withdrawal by another public company's planned acquisition of Vertical 
C)  Vertical claimed Deloitte committed fraud in its audit of Vertical 
D)  Deloitte issued a modified opinion (adverse) on Vertical's financial statements thereby leading to the withdrawal by another public company's planned acquisition of Vertical 
A)  Vertical claimed the firm's false accusations of fraudulent conduct led to the withdrawal of another public company's planned acquisition of Vertical 
B)  Deloitte failed to issue an audit report on a timely basis thereby leading to the withdrawal by another public company's planned acquisition of Vertical 
C)  Vertical claimed Deloitte committed fraud in its audit of Vertical 
D)  Deloitte issued a modified opinion (adverse) on Vertical's financial statements thereby leading to the withdrawal by another public company's planned acquisition of Vertical

Question 12

The legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future is referred to as:

Accepted Answer

A)  Business law 
B)  Tort law 
C)  Common law 
D)  Statutory law 
A)  Business law 
B)  Tort law 
C)  Common law 
D)  Statutory law

Question 13

The QSGI case raises questions regarding the actions of the CEO and chairman of the board who:

Accepted Answer

A)  Accelerated revenue into an earlier period without proper documentation 
B)  Delayed expenses into a later period through the use of reserves 
C)  Violated the Foreign Corrupt Practices Act 
D)  Circumvented internal controls for inventory and falsified records. 
A)  Accelerated revenue into an earlier period without proper documentation 
B)  Delayed expenses into a later period through the use of reserves 
C)  Violated the Foreign Corrupt Practices Act 
D)  Circumvented internal controls for inventory and falsified records.

Question 14

When courts find accountants liable for constructive fraud, the implication is that:

Accepted Answer

A)  Auditors should always be liable when investors lose money due to deceit 
B)  Accountants may be liable for fraud even when they had no knowledge of deceit 
C)  Auditors should be able to detect all deceit by management 
D)  Accountants may be held liable even to third parties to whom they did not have a duty 
A)  Auditors should always be liable when investors lose money due to deceit 
B)  Accountants may be liable for fraud even when they had no knowledge of deceit 
C)  Auditors should be able to detect all deceit by management 
D)  Accountants may be held liable even to third parties to whom they did not have a duty

Question 15

Which of the following is NOT a valid defense to legal liability under the Securities Act of 1933?

Accepted Answer

A)  Materiality defense 
B)  Non-negligence defense 
C)  Due diligence defense 
D)  Lack of causation defense 
A)  Materiality defense 
B)  Non-negligence defense 
C)  Due diligence defense 
D)  Lack of causation defense

Question 16

The name of the term used to describe deficiencies in internal control over financial reporting where there is a reasonable possibility that a material misstatement will not be detected on a timely basis is called:

Accepted Answer

A)  Significant deficiency 
B)  Recklessness 
C)  Material weakness 
D)  Negligence 
A)  Significant deficiency 
B)  Recklessness 
C)  Material weakness 
D)  Negligence

Question 17

The Credit Alliance v. Arthur Andersen & Co. case established three tests that must be satisfied for holding auditors liable for negligence to third parties. All of the following are tests described except:

Accepted Answer

A)  Knowledge by the accountant that the financial statements are to be used for a particular purpose 
B)  The intention of the third party to rely on those statements 
C)  Some action by the accountant linking him or her to the third party that provides evidence of the accountant's understanding of intended reliance 
D)  The identity of the third party must be directly known to the auditor 
A)  Knowledge by the accountant that the financial statements are to be used for a particular purpose 
B)  The intention of the third party to rely on those statements 
C)  Some action by the accountant linking him or her to the third party that provides evidence of the accountant's understanding of intended reliance 
D)  The identity of the third party must be directly known to the auditor

Question 18

The "particularity" provision in the PSLRA allows a plaintiff to:

Accepted Answer

A)  Sue the auditor 
B)  Assert scienter 
C)  Sue management 
D)  Assert privity 
A)  Sue the auditor 
B)  Assert scienter 
C)  Sue management 
D)  Assert privity

Question 19

Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor?

Accepted Answer

A)  The auditor had its work reviewed by another audit firm 
B)  The auditor cites adherence to generally accepted auditing standards (GAAS) 
C)  No omissions or misstatements have been found in the client's financial statements 
D)  The auditor signs a statement expressing its unmodified opinion as to the fairness of the financial statements 
A)  The auditor had its work reviewed by another audit firm 
B)  The auditor cites adherence to generally accepted auditing standards (GAAS) 
C)  No omissions or misstatements have been found in the client's financial statements 
D)  The auditor signs a statement expressing its unmodified opinion as to the fairness of the financial statements

Question 20

A payment made to foreign government officials to ensure that they do what is expected given their job requirements can be characterized as a(n):

Accepted Answer

A)  Bribe 
B)  Asset misappropriation 
C)  Facilitating Payment 
D)  Legal Payment 
A)  Bribe 
B)  Asset misappropriation 
C)  Facilitating Payment 
D)  Legal Payment

In the Advanced Battery Technologies case, the opinion of the court:

The U.S. Supreme Court ruled in State Street v. Ernst that:

What is a worrisome consequence under the joint and several liability principle?

Which of the following is NOT one of the defenses an auditor can use against third party lawsuits for fraud?

What argument can be made that SOX may not be effective in reducing fraud?

The Restatement (Second) of Torts Approach:

Describe the steps auditors should take to protect themselves against allegations that fraud went undetected during the audit.

The name of the term used to describe issues that are important enough to merit attention from those responsible for oversight over financial reporting is commonly called:

A privity relationship means that:

In the Vertical Pharmaceuticals case, Deloitte & Touche was sued because:

The legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future is referred to as:

The QSGI case raises questions regarding the actions of the CEO and chairman of the board who:

When courts find accountants liable for constructive fraud, the implication is that:

Which of the following is NOT a valid defense to legal liability under the Securities Act of 1933?

The name of the term used to describe deficiencies in internal control over financial reporting where there is a reasonable possibility that a material misstatement will not be detected on a timely basis is called:

The Credit Alliance v. Arthur Andersen & Co. case established three tests that must be satisfied for holding auditors liable for negligence to third parties. All of the following are tests described except:

The "particularity" provision in the PSLRA allows a plaintiff to:

Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor?

A payment made to foreign government officials to ensure that they do what is expected given their job requirements can be characterized as a(n):

Ethical Reasoning: Implications for Accounting

Cognitive Processes and Ethical Decision Making in Accounting

Organizational Ethics and Corporate Governance

Ethics and Professional Judgment in Accounting

Fraud in Financial Statements and Auditor Responsibilities

Earnings Management

Ethical Leadership and Decision-Making in Accounting

Filters

Exam 6: Legal, Regulatory, and Professional Obligations of Auditors

In the Advanced Battery Technologies case, the opinion of the court:

The U.S. Supreme Court ruled in State Street v. Ernst that:

What is a worrisome consequence under the joint and several liability principle?

Which of the following is NOT one of the defenses an auditor can use against third party lawsuits for fraud?

What argument can be made that SOX may not be effective in reducing fraud?

The Restatement (Second) of Torts Approach:

Describe the steps auditors should take to protect themselves against allegations that fraud went undetected during the audit.

The name of the term used to describe issues that are important enough to merit attention from those responsible for oversight over financial reporting is commonly called:

A privity relationship means that:

In the Vertical Pharmaceuticals case, Deloitte & Touche was sued because:

The legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future is referred to as:

The QSGI case raises questions regarding the actions of the CEO and chairman of the board who:

When courts find accountants liable for constructive fraud, the implication is that:

Which of the following is NOT a valid defense to legal liability under the Securities Act of 1933?

The name of the term used to describe deficiencies in internal control over financial reporting where there is a reasonable possibility that a material misstatement will not be detected on a timely basis is called:

The Credit Alliance v. Arthur Andersen & Co. case established three tests that must be satisfied for holding auditors liable for negligence to third parties. All of the following are tests described except:

The "particularity" provision in the PSLRA allows a plaintiff to:

Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor?

A payment made to foreign government officials to ensure that they do what is expected given their job requirements can be characterized as a(n):

Ethical Reasoning: Implications for Accounting

Cognitive Processes and Ethical Decision Making in Accounting

Organizational Ethics and Corporate Governance

Ethics and Professional Judgment in Accounting

Fraud in Financial Statements and Auditor Responsibilities

Earnings Management

Ethical Leadership and Decision-Making in Accounting

Filters