Question 1

The failure by an accountant to use the care of a reasonably competent accountant under the circumstances is:

Accepted Answer

A)  negligence. 
B)  material breach. 
C)  substantial performance. 
D)  fraud. 
A)  negligence. 
B)  material breach. 
C)  substantial performance. 
D)  fraud.

Question 2

An accountant who willfully violates Section 11 of the 1933 Securities Act is subject only to civil liability.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Juanita works for Chevco but owns no Chevco stock. She buys 10 shares of a new issue of company stock as a savings plan and afterward receives the signed registration statement, which contains an untrue statement of material fact. Because she works for Chevco, she recognizes the error. Can she sue the auditor?

Accepted Answer

A)  Yes, under Section 11, proof of reliance is usually not required. 
B)  Yes, if she can prove she would not have bought the stock otherwise. 
C)  No, because she did not rely on the statement. 
D)  No, because there is no privity between Juanita and the auditor. 
A)  Yes, under Section 11, proof of reliance is usually not required. 
B)  Yes, if she can prove she would not have bought the stock otherwise. 
C)  No, because she did not rely on the statement. 
D)  No, because there is no privity between Juanita and the auditor.

Question 5

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

Question 6

A group of investors brings a class action lawsuit against the Z & R Accounting Firm under Section 10b and Rule 10b-5 of the 1934 Securities Act. Angela, an accountant with the firm, had done an audit of the Pennymart Inc. books. The audit failed to disclose that Orrin, the president of Pennymart, had stolen large amounts of cash from the firm. Pennymart eventually filed for bankruptcy as a result of the thefts. What is the likely result of the suit?

Accepted Answer

In general, accountants may be held civi

Question 7

An accountant has no liability to parties other than the client.

Accepted Answer

A) True 
 B)False

Question 8

An accountant who contractually promises to conduct an audit to detect possible embezzlement is under a contractual obligation to provide an expanded audit beyond generally accepted auditing standards.

Accepted Answer

A) True 
 B)False

Question 9

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 10

The Private Securities Litigation Reform Act of 1995 provides that an auditor can be held liable in a private action for any finding, conclusion, or statement expressed in the report the Act requires the auditor to make to the SEC.

Accepted Answer

A) True 
 B)False

Question 11

An accountant who substantially performs his contractual duties is generally entitled to be compensated for the contractually agreed-upon fee, less any damages caused to the client.

Accepted Answer

A) True 
 B)False

Question 12

List the services that the Sarbanes-Oxley Act prohibits accounting firms from performing for audit clients.

Accepted Answer

In order to make auditors more independe

Question 13

An accountant may not disclose the contents of his working papers under any circumstances.

Accepted Answer

A) True 
 B)False

Question 14

In recent years, accountants have been subject to civil lawsuits based on the Racketeering Influenced and Corrupt Organizations Act.

Accepted Answer

A) True 
 B)False

Question 15

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 16

Which of the following defenses may be raised by an accountant under Section 11 of the 1933 Securities Act?

Accepted Answer

A)  Privity and due diligence. 
B)  Privity, but not due diligence. 
C)  Due diligence, but not privity. 
D)  Neither privity nor due diligence. 
A)  Privity and due diligence. 
B)  Privity, but not due diligence. 
C)  Due diligence, but not privity. 
D)  Neither privity nor due diligence.

Question 17

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

Accepted Answer

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

Question 18

Under the Securities Exchange Act of 1934, an accountant's liability for false or misleading statements is based on a good faith negligence standard.

Accepted Answer

A) True 
 B)False

Question 19

An accountant is negligent if she does not exercise the degree of care a reasonably competent accountant would exercise under the circumstances.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following would NOT constitute scienter?

Accepted Answer

A)  Negligent performance of a substandard audit. 
B)  Actual knowledge of fraud. 
C)  Reckless disregard for truth. 
D)  Being paid to conceal fraud. 
A)  Negligent performance of a substandard audit. 
B)  Actual knowledge of fraud. 
C)  Reckless disregard for truth. 
D)  Being paid to conceal fraud.

Exam 43: Accountants Legal Liability

The failure by an accountant to use the care of a reasonably competent accountant under the circumstances is:

An accountant who willfully violates Section 11 of the 1933 Securities Act is subject only to civil liability.

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

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

An accountant has no liability to parties other than the client.

An accountant who contractually promises to conduct an audit to detect possible embezzlement is under a contractual obligation to provide an expanded audit beyond generally accepted auditing standards.

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

The Private Securities Litigation Reform Act of 1995 provides that an auditor can be held liable in a private action for any finding, conclusion, or statement expressed in the report the Act requires the auditor to make to the SEC.

An accountant who substantially performs his contractual duties is generally entitled to be compensated for the contractually agreed-upon fee, less any damages caused to the client.

List the services that the Sarbanes-Oxley Act prohibits accounting firms from performing for audit clients.

An accountant may not disclose the contents of his working papers under any circumstances.

In recent years, accountants have been subject to civil lawsuits based on the Racketeering Influenced and Corrupt Organizations Act.

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.

Which of the following defenses may be raised by an accountant under Section 11 of the 1933 Securities Act?

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

Under the Securities Exchange Act of 1934, an accountant's liability for false or misleading statements is based on a good faith negligence standard.

An accountant is negligent if she does not exercise the degree of care a reasonably competent accountant would exercise under the circumstances.

Which of the following would NOT constitute scienter?

Introduction to Law

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Secured Transactions and Suretyship

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