Exam 51: Accountants' Liability

Johnson and Peterson Company,CPAs,have been hired to perform a specialized audit of Elmville National Bank.The report that Fran prepares will be presented to Acme Bonding Insurance Company for its review prior to issuing an insurance policy to Elmville Bank to cover embezzlement losses caused by the bank's employees.Fran's firm completes the audit and prepares a report that indicates that there are no significant problems.Unfortunately,Fran negligently omitted certain procedures and failed to notice that Elmville had weak internal controls.These weak controls meant that an employee could easily embezzle large amounts of money from the bank.The bank showed the report to Acme Bonding and Acme renewed the insurance policy.Elmville also used the report to encourage Billy to make a large investment in the bank.Soon thereafter,Elmville Bank failed after one of its employees embezzled large amounts of cash and then disappeared.Discuss the liability of Johnson and Peterson Company to Acme and to Billy under each of the three rules for accountant liability to third parties.

What is the ethical dilemma that an accountant often faces in the course of an audit engagement?

The guidelines that accountants must follow in conducting an audit are the:

Jake is a CPA who worked on the audit of Dream Drive Motors,Inc.Although the client's financial statements fairly presented its financial results and position,certain client personnel had been engaged in illegal activities aimed at defrauding the federal government.Can Jake be called to testify about any matters that he learned in the course of his audit of Dream Drive?

Accountants' working papers remain the property of the client.

In order for the foreseeability standard to apply,the accountant must know the identity of either the user or the intended class of users.

An accountant who performs an audit may follow other auditing standards than those in the GAAS.

The contractual arrangement of an accountant with the client is often referred to as a(n):

Anne,a Certified Public Accountant,was hired by a retail hardware store to perform an audit on the store's financial statements.In the agreement for this engagement was a clause stating that the audited financial statements would be used "to obtain further inventory financing from Second National Bank or another local bank." Anne completed the audit and issued an unqualified opinion.The client obtained the financing from Heartland National Bank,another local bank.Unfortunately,Anne had been negligent in conducting the audit,and the inventory had been greatly overstated.As a result,there was inadequate collateral for Heartland's loan,and when the hardware store went bankrupt a few months later,Heartland suffered a loss.Under which of the rules for an accountant's liability to third parties could Heartland recover from Anne?

Under the federal securities laws,the Securities and Exchange Commission decides whether to bring criminal charges against an accountant.

How many general rules of liability are there for accountants' liability for negligence to third parties under state law?

If an auditor determines that the financial statements fairly present the financial results and position of the client except for one fairly minor,but material,item that is not properly presented,the auditor would issue a(n):

Accountants can be held liable under Section 11 of the Securities Act of 1933.

Why is third party liability such an issue for accountants but not for most other professionals?

Which of the following is true about the general standard of care owed by an accountant to the client?

An accountant can be liable for misstatements in financial statements under Section 11 of the Securities Act of 1933 only if the accountant actually made the misstatement.

Section 10(b)of the Securities Exchange Act of 1934 applies exclusively to the purchase of any security.

Which of the following is not typically a common law basis of liability to the client of an accountant?

Which of the following is not one of the requirements for an accountant to become a certified public accountant?

Patricia,a Certified Public Accountant,was hired to audit the financial statements of a large Internet retailer that was planning a new issuance of stock.The client had made several public offerings of stock in recent years and was required to meet the reporting requirements of the Securities Exchange Act of 1934.In performing her audit,Patricia was negligent.Although she was unaware of the fact,the financial statements greatly overstated accounts receivable because the client had recorded numerous fictitious sales.The audited financial statements were included in the registration statement for the new public offering and in the reports filed under the Securities Act of 1934.Patricia faces statutory liability under: