Exam 27: Accountants' Liability

Larry is a certified public accountant in a firm which audits public companies.Larry is accused of unethical conduct.Is Larry required to abide by the ethical standards of the Public Company Accounting Oversight Board?

GBH,an accounting firm,was hired to prepare financial statements for E-treme.Great State Bank has asked to see GBH's working papers since it is thinking about extending a $4 million line of credit to E-treme.Which of the following statements is correct?

An auditor suspects its client is committing illegal acts that will have a material impact on its financial statements.What is the auditor legally required to do and under what circumstances would the auditor directly notify the SEC?

Ron is an accountant who was contacted by Zebra Toy Company to prepare financial statements.Zebra Toy Company told Ron that it wished to present these documents to Lion Wholesalers,Inc.,a large supplier of toys.If Lion is convinced that Zebra Toy Company is financially solid,it will issue Zebra a large line of credit. After Ron prepares the financial documents,Zebra presents the information to Lion Wholesalers and also to Tiger Toy Company,another wholesaler of toys.Zebra wishes to obtain a line of credit from Tiger as well as from Lion.If Ron committed a serious error by overstating Zebra Toy Company's financial soundness and the two creditors,Lion and Tiger,are damaged as a result,can these third parties recover damages from Ron? Explain.

Teresa is suing her accountant for fraud.To win,Teresa must show that she justifiably relied on the accountant's fraudulent statement.

Clint is auditing MegaCorp.In reviewing the sales ledger,Clint saw that MegaCorp had sold 3,000 disk drives to CompSales,Inc.Clint reviewed the original invoice of this sale to ensure that the date,price,quantity,and customer's name all match.He then verified each step along the paper trail until the disk drives left the warehouse.This illustrates

Discuss how SEC rules affect the legal and the ethical relationship between accountants and the companies they audit.

Rick prepared financial statements for MegaCorp knowing that it was going to use his statements to apply for a loan with Big Bank.When Big Bank turned MegaCorp down,it applied to Fourth Bank for a loan.MegaCorp presented the statements prepared by Rick to Fourth Bank which gave the company a loan.It was discovered that Rick was negligent in preparing the statements,and Fourth Bank sued Rick.Under which of the following tests is Rick liable?

Auditors cannot protect themselves from liability to third parties by issuing a qualified or an adverse opinion.

To prevail under Section 11 of the 1933 Securities Act,a plaintiff must prove

Criminal liability for accountants

After completing an audit,the most unfavorable opinion an auditor can issue is a disclaimer of opinion.

Manuel,in conducting an audit,must rely most heavily on rules found in generally accepted accounting principles (GAAP).

The Big Four accounting firms spend about what percentage of their revenue on litigation,including settlements and insurance?

The accounting firm of Gray & Co.did accounting work for both Regional Bank and Carter Electronics.Without Carter's knowledge or approval,Gray & Co.discussed Carter's financial problems with Regional Bank.In this situation,Gray & Co.

Sally prepared financial statements for MegaCorp knowing that the company would be using her statements when applying for a loan at Big Bank.It is discovered she was negligent in preparing the statements and Big Bank sued her.Sally is liable under the

Generally accepted accounting principles (GAAP)are the rules for preparing financial statements.

Discuss the advantages and disadvantages of using IFRS.

John is a CPA in charge of auditing his client,McMillen & Co.John's duty of care to McMillen will most likelybe breached if John

If a plaintiff is successful in proving that an auditor has violated Section 10(b)of the 1934 Securities Exchange Act,the auditor has