Question 1

Accountants' liability under the 1933 and 1934 Securities Acts is less extensive and has more limitations than liability under the common law.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is correct with respect to the accountant-client privilege?

Accepted Answer

A)  Some states statutorily recognize such a privilege. 
B)  Federal law recognizes such a privilege. 
C)  The common law recognizes such a privilege. 
D)  All of these are correct. 
A)  Some states statutorily recognize such a privilege. 
B)  Federal law recognizes such a privilege. 
C)  The common law recognizes such a privilege. 
D)  All of these are correct.

Question 3

In what situations is the accountant-client privilege recognized?

Accepted Answer

A)  It is only recognized in federal court proceedings. 
B)  It is recognized in most states by reason of court decisions. 
C)  It is recognized by virtue of the common law in most states. 
D)  It is recognized only in those states that have enacted statutes creating such a privilege. 
A)  It is only recognized in federal court proceedings. 
B)  It is recognized in most states by reason of court decisions. 
C)  It is recognized by virtue of the common law in most states. 
D)  It is recognized only in those states that have enacted statutes creating such a privilege.

Question 4

To lessen his tax liability, a client asks his accountant to misstate information on his tax return.If the accountant does so, she may be subject to fines and up to three years in prison.

Accepted Answer

A) True 
 B)False

Question 5

A five-member Public Company Accounting Oversight Board oversees the audit of public companies, and the SEC oversees the Board.

Accepted Answer

A) True 
 B)False

Question 6

In providing services for his client, an accountant obtains information concerning the client's business affairs.What are the legal issues concerning this client information?

Accepted Answer

The legal issues concerning the client's

Question 7

Matthew decides to invest in the stock of a television production company after he reads Edgar's audit, which includes a known falsity as to the value of numerous worthless securities held as corporate assets.If Matthew sues Edgar, he will be entitled to:

Accepted Answer

A)  nominal damages only. 
B)  nothing, in a majority of states, since the class of foreseen users of the audit contract does not include potential investors and the general public. 
C)  compensatory damages, in a majority of states, if he is a foreseen user of the audit. 
D)  rescission of his purchase contract. 
A)  nominal damages only. 
B)  nothing, in a majority of states, since the class of foreseen users of the audit contract does not include potential investors and the general public. 
C)  compensatory damages, in a majority of states, if he is a foreseen user of the audit. 
D)  rescission of his purchase contract.

Question 8

Mary tells her accountant, "I must have this year's audit completed by March 1, and time is of the essence." The accountant agrees to complete the audit by March 1.Under general contract law, if the audit is not completed by March 1, Mary does not have to pay the accountant for the audit.

Accepted Answer

A) True 
 B)False

Question 9

Audit working papers would include which of the following?

Accepted Answer

A)  Records of accounting and auditing procedures and tests performed. 
B)  Accountant fees accrued for the year from all accounts. 
C)  A collection of IRS rulings related to auditing in general. 
D)  Engagement letters. 
A)  Records of accounting and auditing procedures and tests performed. 
B)  Accountant fees accrued for the year from all accounts. 
C)  A collection of IRS rulings related to auditing in general. 
D)  Engagement letters.

Question 10

An accountant is generally held to be the owner of the working papers he uses in performing an audit.

Accepted Answer

A) True 
 B)False

Question 11

The lead audit partner having primary responsibility for an audit and the partner responsible for reviewing the audit must rotate at least every 3 years.

Accepted Answer

A) True 
 B)False

Question 12

An implied agreement in the contractual relationship is the agreement by the accountant to act in a competent and professional manner.

Accepted Answer

A) True 
 B)False

Question 13

Pam certified a statement prepared by John, her employee, without checking John's work.He was never known to be anything but diligent and his integrity had never been questioned.The audit contained gross misstatements.Pam defends a suit against her claiming "due diligence." She will:

Accepted Answer

A)  fail, because she is automatically liable for her employee's act. 
B)  succeed, since she had no reason to believe her employee would lie. 
C)  succeed, because a reasonable person would have inquired further. 
D)  fail, because due diligence requires reasonable investigation. 
A)  fail, because she is automatically liable for her employee's act. 
B)  succeed, since she had no reason to believe her employee would lie. 
C)  succeed, because a reasonable person would have inquired further. 
D)  fail, because due diligence requires reasonable investigation.

Question 14

Edmund, who is auditing the books of Windgrove Co., becomes aware of information indicating an illegal act within the company.Edmund must:

Accepted Answer

A)  resign immediately to avoid criminal liability. 
B)  notify local law enforcement and remove himself from any association with the company. 
C)  determine whether an illegal act occurred and, if it did, the possible effect on Windgrove's financial statements. 
D)  notify the SEC immediately so it can conduct an investigation. 
A)  resign immediately to avoid criminal liability. 
B)  notify local law enforcement and remove himself from any association with the company. 
C)  determine whether an illegal act occurred and, if it did, the possible effect on Windgrove's financial statements. 
D)  notify the SEC immediately so it can conduct an investigation.

Question 15

Martin agrees to perform an audit within 30 days, knowing that time is of the essence.After the 30 days, Martin has only performed 60% of the audit.Martin has materially breached his contract.

Accepted Answer

A) True 
 B)False

Question 16

In which of the following situations would an accountant be subject to criminal liability?

Accepted Answer

A)  Where the accountant willfully breached a contract. 
B)  Where the accountant refused to turn over working papers to a client. 
C)  Where the accountant willfully omitted a material fact on a securities registration statement. 
D)  Where the accountant negligently performed an audit. 
A)  Where the accountant willfully breached a contract. 
B)  Where the accountant refused to turn over working papers to a client. 
C)  Where the accountant willfully omitted a material fact on a securities registration statement. 
D)  Where the accountant negligently performed an audit.

Question 17

The Sarbanes-Oxley Act establishes a new regulatory body to oversee public company auditors, makes auditors more closely connected to their clients, and places direct responsibility for the audit relationship on the auditor himself.

Accepted Answer

A) True 
 B)False

Question 18

Most courts allow an accountant to raise the defense of the plaintiff's contributory or comparative negligence.

Accepted Answer

A) True 
 B)False

Question 19

An accountant who willfully violates Section 11 of the Securities Act of 1933 is subject to fines of up to $100,000 or imprisonment of not more than three years, or both.

Accepted Answer

A) True 
 B)False

Question 20

In the Ernst & Ernst v.Hochfelder case, the Supreme Court stated that Section 10(b) of the 1934 Act and SEC Rule 10b-5 apply only to intentional conduct and not to negligence.

Accepted Answer

A) True 
 B)False

Exam 43: Accountants Legal Liability

Accountants' liability under the 1933 and 1934 Securities Acts is less extensive and has more limitations than liability under the common law.

Which of the following is correct with respect to the accountant-client privilege?

In what situations is the accountant-client privilege recognized?

To lessen his tax liability, a client asks his accountant to misstate information on his tax return.If the accountant does so, she may be subject to fines and up to three years in prison.

A five-member Public Company Accounting Oversight Board oversees the audit of public companies, and the SEC oversees the Board.

In providing services for his client, an accountant obtains information concerning the client's business affairs.What are the legal issues concerning this client information?

Matthew decides to invest in the stock of a television production company after he reads Edgar's audit, which includes a known falsity as to the value of numerous worthless securities held as corporate assets.If Matthew sues Edgar, he will be entitled to:

Mary tells her accountant, "I must have this year's audit completed by March 1, and time is of the essence." The accountant agrees to complete the audit by March 1.Under general contract law, if the audit is not completed by March 1, Mary does not have to pay the accountant for the audit.

Audit working papers would include which of the following?

An accountant is generally held to be the owner of the working papers he uses in performing an audit.

The lead audit partner having primary responsibility for an audit and the partner responsible for reviewing the audit must rotate at least every 3 years.

An implied agreement in the contractual relationship is the agreement by the accountant to act in a competent and professional manner.

Pam certified a statement prepared by John, her employee, without checking John's work.He was never known to be anything but diligent and his integrity had never been questioned.The audit contained gross misstatements.Pam defends a suit against her claiming "due diligence." She will:

Edmund, who is auditing the books of Windgrove Co., becomes aware of information indicating an illegal act within the company.Edmund must:

Martin agrees to perform an audit within 30 days, knowing that time is of the essence.After the 30 days, Martin has only performed 60% of the audit.Martin has materially breached his contract.

In which of the following situations would an accountant be subject to criminal liability?

The Sarbanes-Oxley Act establishes a new regulatory body to oversee public company auditors, makes auditors more closely connected to their clients, and places direct responsibility for the audit relationship on the auditor himself.

Most courts allow an accountant to raise the defense of the plaintiff's contributory or comparative negligence.

An accountant who willfully violates Section 11 of the Securities Act of 1933 is subject to fines of up to $100,000 or imprisonment of not more than three years, or both.

In the Ernst & Ernst v.Hochfelder case, the Supreme Court stated that Section 10(b) of the 1934 Act and SEC Rule 10b-5 apply only to intentional conduct and not to negligence.

Introduction to Law

Business Ethicspart Ii: the Legal Environment of Business

Civil Dispute Resolution

Constitutional Law

Administrative Law

Criminal Law

Negligence and Strict Liabilitypart Iii: Contracts

Introduction to Contracts

Mutual Assent

Conduct Invalidating Assent

Consideration

Illegal Bargains

Contractual Capacity

Contracts in Writing

Third Parties to Contracts

Performance, Breach, and Discharge

Contract Remediespart Iv: Sales

Introduction to Sales and Leases

Performance

Transfer of Title and Risk of Loss

Product Liability: Warranties and Strict Liability

Sales Remediespart V: Negotiable Instruments

Form and Content

Transfer and Holder in Due Course

Liability of Parties

Bank Deposits, Collections, and Funds Transferspart Vi: Agency

Relationship of Principal and Agent

Relationship With Third Partiespart Vii: Business Associations

Formation and Internal Relations of General Partnerships

Operation and Dissolution of General Partnerships

Limited Partnerships and Limited Liability Companies

Nature and Formation of Corporations

Financial Structure of Corporations

Management Structure of Corporations

Fundamental Changes of Corporationspart Viii: Debtor and Creditor Relations

Secured Transactions and Suretyship

Bankruptcypart Ix: Regulation of Business

Securities Regulation

Intellectual Property

Employment Law

Antitrust

Consumer Protection

International Business Lawpart X: Property

Introduction to Property, Property Insurance, Bailments, and Documents of Title

Interests in Real Property

Transfer and Control of Real Property

Trusts and Wills

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