Question 1

Under the 1934 Securities Exchange Act, accountants may be prosecuted for criminal liability.

Accepted Answer

A) True 
 B)False

Question 2

The auditor's position under Section 18 of the 1934 Act is essentially the same as under:

Accepted Answer

A)  the Restatement (Second) of Torts. 
B)  the Rosenblum Ruling in common law. 
C)  the Natelli Ruling in criminal law. 
D)  the Ultramares Ruling in common law. 
E)  Section 11 of the 1933 Act. 
A)  the Restatement (Second) of Torts. 
B)  the Rosenblum Ruling in common law. 
C)  the Natelli Ruling in criminal law. 
D)  the Ultramares Ruling in common law. 
E)  Section 11 of the 1933 Act.

Question 3

In tort actions, the primary defenses available to the auditor are due care and contributory negligence.

Accepted Answer

A) True 
 B)False

Question 4

Under common law, primary beneficiaries are those who are named in the contract.

Accepted Answer

A) True 
 B)False

Question 5

The Private Securities Litigation Reform Act of 1995 instituted a system of proportionate liability under which defendants who are not found to have "knowingly committed a violation" of securities laws are liable based on the defendant's percentage of responsibility.

Accepted Answer

A) True 
 B)False

Question 6

The first shift away from Ultramares occurred in the form of judicial acceptance of the specifically unforeseen class concept.

Accepted Answer

A) True 
 B)False

Question 7

Section 18 of the 1934 Securities Exchange Act provides a defense when the auditor can show that he or she acted in good faith, or had no knowledge that the financial statements were false or misleading.

Accepted Answer

A) True 
 B)False

Question 8

1.Distinguish between the following: 
(a) primary versus other beneficiaries and (b) foreseen group versus foreseeable parties. Identify the principal cases that extended the accountant's liability for ordinary negligence to each of the parties identified in (b) above.

2.Contrast the terms "contributory negligence" and "due diligence defense."

3.Explain the essence of Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934. Indicate the landmark case pertaining to this rule and the findings of the court in the case.

4.Why is it advantageous for a plaintiff to bring suit under the Racketeer Influenced and Corrupt Organization Act (RICO)? May a CPA be liable under RICO for ordinary negligence? Explain.

Accepted Answer

1.(a)
A primary beneficiary is a third p

Question 9

Criminal indictments may be brought against auditors under the 1934 Act.

Accepted Answer

A) True 
 B)False

Question 10

The main reason a plaintiff would bring suit against the auditor under RICO instead of under the anti-fraud provisions of the 1934 Securities Exchange Act is:

Accepted Answer

A)  the possibility of treble damages and attorneys' fees. 
B)  federal fraud action may be brought in state court. 
C)  the possibility of double damages. 
D)  prison terms may be provided along with civil damages. 
E)  it is easier to prove fraud than gross negligence. 
A)  the possibility of treble damages and attorneys' fees. 
B)  federal fraud action may be brought in state court. 
C)  the possibility of double damages. 
D)  prison terms may be provided along with civil damages. 
E)  it is easier to prove fraud than gross negligence.

Question 11

In order for a plaintiff to recover against an auditor under the 1933 Securities Act, he or she must normally prove:

Accepted Answer

A)  reliance on the financial statements. 
B)  gross negligence on the part of the auditor. 
C)  the financial statements were materially false or misleading. 
D)  ordinary negligence on the part of the auditor. 
E)  reliance, misleading statements and ordinary negligence. 
A)  reliance on the financial statements. 
B)  gross negligence on the part of the auditor. 
C)  the financial statements were materially false or misleading. 
D)  ordinary negligence on the part of the auditor. 
E)  reliance, misleading statements and ordinary negligence.

Question 12

Section 11 of the 1933 Securities Act uses the term "material fact" to limit the amount of information required. Under the Act, the standard used to determine the materiality of an item:

Accepted Answer

A)  is the auditor's professional judgment. 
B)  has been established by the SEC as a percent of net income or of total assets. 
C)  can be found in pronouncements of the FASB. 
D)  is the average prudent investor. 
E)  can be found in pronouncements of the AICPA. 
A)  is the auditor's professional judgment. 
B)  has been established by the SEC as a percent of net income or of total assets. 
C)  can be found in pronouncements of the FASB. 
D)  is the average prudent investor. 
E)  can be found in pronouncements of the AICPA.

Question 13

In the Continental Vending case (US v. Simon), the courts held that the "critical test" was fair presentation, not compliance with GAAP.

Accepted Answer

A) True 
 B)False

Question 14

Gross negligence can best be defined as:

Accepted Answer

A)  failure to exercise due care. 
B)  misrepresentation. 
C)  failure to exercise even slight care. 
D)  criminal fraud. 
E)  collusion. 
A)  failure to exercise due care. 
B)  misrepresentation. 
C)  failure to exercise even slight care. 
D)  criminal fraud. 
E)  collusion.

Question 15

Under the 1933 Securities Act, the burden of proof is on the auditor to show that he or
she was not negligent.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following would be least likely to be considered an "other beneficiary" or unnamed third party to a contract?

Accepted Answer

A)  creditors 
B)  competitors 
C)  stockholders 
D)  potential investors 
E)  banks 
A)  creditors 
B)  competitors 
C)  stockholders 
D)  potential investors 
E)  banks

Question 17

The auditor's legal liability to third parties under common law extends to:

Accepted Answer

A)  all third parties for all acts of negligence. 
B)  all third parties for acts of fraud; select third parties for gross and ordinary negligence. 
C)  select third parties for fraud, gross negligence, and ordinary negligence. 
D)  all third parties for all acts of willful misconduct. 
E)  all third parties for acts of fraud and gross negligence; select third parties for ordinary negligence. 
A)  all third parties for all acts of negligence. 
B)  all third parties for acts of fraud; select third parties for gross and ordinary negligence. 
C)  select third parties for fraud, gross negligence, and ordinary negligence. 
D)  all third parties for all acts of willful misconduct. 
E)  all third parties for acts of fraud and gross negligence; select third parties for ordinary negligence.

Question 18

In most states, contributory negligence is a defense for the auditor only when the negligence directly contributes to the auditor's failure to perform.

Accepted Answer

A) True 
 B)False

Question 19

Action under RICO requires a "pattern" of racketeering activity. Under this law, a pattern exists with commission of the racketeering act at least:

Accepted Answer

A)  5 times in 5 years. 
B)  5 times in 2 years. 
C)  3 times in 3 years. 
D)  2 times in 10 years. 
E)  2 times in 5 years. 
A)  5 times in 5 years. 
B)  5 times in 2 years. 
C)  3 times in 3 years. 
D)  2 times in 10 years. 
E)  2 times in 5 years.

Question 20

All of the following are true with respect to the plaintiff in a suit under the 1933 Securities Act except the plaintiff:

Accepted Answer

A)  may be any person acquiring securities described in the registration statement, whether or not he or she is a client of the auditor. 
B)  must establish that his or her loss resulted in whole or in part from causes other than the false or misleading statements. 
C)  must base the claim on an alleged material false or misleading financial statement contained in the registration statement. 
D)  does not have to prove reliance on the false or misleading statement or that the loss suffered was the proximate result of the statement if purchase was made before the issuance of an income statement covering a period of at least twelve months following the effective date of the registration statement. 
E)  does not have to prove that the auditors were negligent or fraudulent in certifying the financial statements involved. 
A)  may be any person acquiring securities described in the registration statement, whether or not he or she is a client of the auditor. 
B)  must establish that his or her loss resulted in whole or in part from causes other than the false or misleading statements. 
C)  must base the claim on an alleged material false or misleading financial statement contained in the registration statement. 
D)  does not have to prove reliance on the false or misleading statement or that the loss suffered was the proximate result of the statement if purchase was made before the issuance of an income statement covering a period of at least twelve months following the effective date of the registration statement. 
E)  does not have to prove that the auditors were negligent or fraudulent in certifying the financial statements involved.

Under the 1934 Securities Exchange Act, accountants may be prosecuted for criminal liability.

The auditor's position under Section 18 of the 1934 Act is essentially the same as under:

In tort actions, the primary defenses available to the auditor are due care and contributory negligence.

Under common law, primary beneficiaries are those who are named in the contract.

The Private Securities Litigation Reform Act of 1995 instituted a system of proportionate liability under which defendants who are not found to have "knowingly committed a violation" of securities laws are liable based on the defendant's percentage of responsibility.

The first shift away from Ultramares occurred in the form of judicial acceptance of the specifically unforeseen class concept.

Section 18 of the 1934 Securities Exchange Act provides a defense when the auditor can show that he or she acted in good faith, or had no knowledge that the financial statements were false or misleading.

Criminal indictments may be brought against auditors under the 1934 Act.

The main reason a plaintiff would bring suit against the auditor under RICO instead of under the anti-fraud provisions of the 1934 Securities Exchange Act is:

In order for a plaintiff to recover against an auditor under the 1933 Securities Act, he or she must normally prove:

Section 11 of the 1933 Securities Act uses the term "material fact" to limit the amount of information required. Under the Act, the standard used to determine the materiality of an item:

In the Continental Vending case (US v. Simon), the courts held that the "critical test" was fair presentation, not compliance with GAAP.

Gross negligence can best be defined as:

Under the 1933 Securities Act, the burden of proof is on the auditor to show that he or she was not negligent.

Which of the following would be least likely to be considered an "other beneficiary" or unnamed third party to a contract?

The auditor's legal liability to third parties under common law extends to:

In most states, contributory negligence is a defense for the auditor only when the negligence directly contributes to the auditor's failure to perform.

Action under RICO requires a "pattern" of racketeering activity. Under this law, a pattern exists with commission of the racketeering act at least:

All of the following are true with respect to the plaintiff in a suit under the 1933 Securities Act except the plaintiff:

Auditing and the Public Accounting

Financial Statement Audits and

Professional Ethics

Overview of the Audit Process

Audit Evidence, Audit Objectives,

Accepting the Engagement and

Materiality Decisions and Performing Analytical Procedures

Audit Risk, Including the Risk of Fraud

Understanding Internal Controls

Audit Procedures in Response to Assessed Risks: Tests of Controls

Audit Procedures in Response to Assessed Risks: Substantive Tests

Audit Sampling in Substantive Tests

Auditing the Revenue Cycle

Auditing the Expenditure Cycle

Auditing the Production and

Auditing the Investing and

Auditing Investments and

Completing the Audit and Postaudit

Attest and Assurance Services, and Related Reports

Internal, Operational, and

Filters

Exam 4: Auditors Legal Liability

Under the 1934 Securities Exchange Act, accountants may be prosecuted for criminal liability.

The auditor's position under Section 18 of the 1934 Act is essentially the same as under:

In tort actions, the primary defenses available to the auditor are due care and contributory negligence.

Under common law, primary beneficiaries are those who are named in the contract.

The Private Securities Litigation Reform Act of 1995 instituted a system of proportionate liability under which defendants who are not found to have "knowingly committed a violation" of securities laws are liable based on the defendant's percentage of responsibility.

The first shift away from Ultramares occurred in the form of judicial acceptance of the specifically unforeseen class concept.

Section 18 of the 1934 Securities Exchange Act provides a defense when the auditor can show that he or she acted in good faith, or had no knowledge that the financial statements were false or misleading.

Criminal indictments may be brought against auditors under the 1934 Act.

The main reason a plaintiff would bring suit against the auditor under RICO instead of under the anti-fraud provisions of the 1934 Securities Exchange Act is:

In order for a plaintiff to recover against an auditor under the 1933 Securities Act, he or she must normally prove:

Section 11 of the 1933 Securities Act uses the term "material fact" to limit the amount of information required. Under the Act, the standard used to determine the materiality of an item:

In the Continental Vending case (US v. Simon), the courts held that the "critical test" was fair presentation, not compliance with GAAP.

Gross negligence can best be defined as:

Under the 1933 Securities Act, the burden of proof is on the auditor to show that he or she was not negligent.

Which of the following would be least likely to be considered an "other beneficiary" or unnamed third party to a contract?

The auditor's legal liability to third parties under common law extends to:

In most states, contributory negligence is a defense for the auditor only when the negligence directly contributes to the auditor's failure to perform.

Action under RICO requires a "pattern" of racketeering activity. Under this law, a pattern exists with commission of the racketeering act at least:

All of the following are true with respect to the plaintiff in a suit under the 1933 Securities Act except the plaintiff:

Auditing and the Public Accounting

Financial Statement Audits and

Professional Ethics

Overview of the Audit Process

Audit Evidence, Audit Objectives,

Accepting the Engagement and

Materiality Decisions and Performing Analytical Procedures

Audit Risk, Including the Risk of Fraud

Understanding Internal Controls

Audit Procedures in Response to Assessed Risks: Tests of Controls

Audit Procedures in Response to Assessed Risks: Substantive Tests

Audit Sampling in Substantive Tests

Auditing the Revenue Cycle

Auditing the Expenditure Cycle

Auditing the Production and

Auditing the Investing and

Auditing Investments and

Completing the Audit and Postaudit

Attest and Assurance Services, and Related Reports

Internal, Operational, and

Filters