Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

In which of the following cases will the federal accountant-client privilege protect the information from being disclosed?

Accepted Answer

A)  A criminal case. 
B)  A case involving the SEC. 
C)  A case concerning the preparation of tax returns. 
D)  A civil fraud case involving the IRS. 
A)  A criminal case. 
B)  A case involving the SEC. 
C)  A case concerning the preparation of tax returns. 
D)  A civil fraud case involving the IRS.

Question 3

Halbeck,LLC was negligent in its audit of E-treme,Inc.Unbeknownst to Halbeck,E-treme used the financial statements to secure a loan from Great State Bank.Under the foreseeable doctrine,Halbeck will be liable to Great State Bank for its losses on the loan.

Accepted Answer

A) True 
 B)False

Question 4

BGH Accounting firm audited the financial statements that were included in E-prise's registration statement.The financial statements overstated sales by 2000%.In conducting the audit,BGH did not comply with generally accepted auditing standards (GAAS).Under Section 11 of the 1933 Act,BGH is liable for any material misstatement in the financial statements.

Accepted Answer

A) True 
 B)False

Question 5

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:

Accepted Answer

A)  tracing. 
B)  vouching. 
C)  following. 
D)  monitoring. 
A)  tracing. 
B)  vouching. 
C)  following. 
D)  monitoring.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

A study by the Government Accountability Office found:

Accepted Answer

A)  substantial market power in the four largest accounting firms. The Big Four audit 97 percent of all public companies in the United States that have sales over $250 million. 
B)  evidence of collusion among the top accounting firms in the United States. 
C)  conclusive evidence that consolidation in the accounting industry led to an increase in audit fees and a decline in independence. 
D)  All of the above. 
A)  substantial market power in the four largest accounting firms. The Big Four audit 97 percent of all public companies in the United States that have sales over $250 million. 
B)  evidence of collusion among the top accounting firms in the United States. 
C)  conclusive evidence that consolidation in the accounting industry led to an increase in audit fees and a decline in independence. 
D)  All of the above.

Question 8

An auditor for Ralco Accounting firm was auditing the financial statements of E-prise.The auditor suspected that E-prise was engaged in conduct that violated FCPA,a federal law.Under Section 10A of the 1934 Act,the auditor is required to notify E-prise's board of directors of the suspicions.

Accepted Answer

A) True 
 B)False

Question 9

Who owns and controls an accountant's working papers?

Accepted Answer

A)  The client, in theory. 
B)  The IRS. 
C)  The accountant, in theory and practice. 
D)  The AICPA. 
A)  The client, in theory. 
B)  The IRS. 
C)  The accountant, in theory and practice. 
D)  The AICPA.

Question 10

Halbeck,LLC was negligent in its audit of E-treme,Inc.Unbeknownst to Halbeck,E-treme used the financial statements to secure a loan from Great State Bank.Under the Ultramares doctrine,Halbeck will be liable to Great State Bank for its losses on the loan.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A)  the registration statement contained a material misstatement or omission; and the plaintiff lost money. 
B)  the registration statement contained a material misstatement or omission; the auditor acted knowingly or recklessly; and the plaintiff lost money. 
C)  the registration statement contained a material misstatement or omission; the auditor intended to deceive; and the plaintiff lost money. 
D)  the registration statement contained a material misstatement or omission; the auditor acted with scienter; and the plaintiff lost money. 
A)  the registration statement contained a material misstatement or omission; and the plaintiff lost money. 
B)  the registration statement contained a material misstatement or omission; the auditor acted knowingly or recklessly; and the plaintiff lost money. 
C)  the registration statement contained a material misstatement or omission; the auditor intended to deceive; and the plaintiff lost money. 
D)  the registration statement contained a material misstatement or omission; the auditor acted with scienter; and the plaintiff lost money.

Question 12

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?

Accepted Answer

A)  Ultramares doctrine. 
B)  Foreseeable doctrine. 
C)  Restatement doctrine. 
D)  Rick would be liable under both the foreseeable doctrine and the Restatement doctrine. 
A)  Ultramares doctrine. 
B)  Foreseeable doctrine. 
C)  Restatement doctrine. 
D)  Rick would be liable under both the foreseeable doctrine and the Restatement doctrine.

Question 13

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?

Accepted Answer

A)  Yes. 
B)  He can be held liable only if he had actual knowledge of the particular guideline he is accused of violating. 
C)  No, the PCAOB establishes audit rules, not ethical guidelines. 
D)  No, the PCAOB has no authority over Larry. 
A)  Yes. 
B)  He can be held liable only if he had actual knowledge of the particular guideline he is accused of violating. 
C)  No, the PCAOB establishes audit rules, not ethical guidelines. 
D)  No, the PCAOB has no authority over Larry.

Question 14

To verify transactions,accountants use two mirror-image processes: vouching and tracing.Tracing is a process where the accountant begins with an item of original data and checks out all the activity that has occurred from beginning to end to make sure it has been properly recorded throughout the bookkeeping process.

Accepted Answer

A) True 
 B)False

Question 15

An auditor who determines a company is materially misstating certain items on its financial statements should issue:

Accepted Answer

A)  an unqualified opinion. 
B)  a qualified opinion. 
C)  an adverse opinion. 
D)  a disclaimer of opinion. 
A)  an unqualified opinion. 
B)  a qualified opinion. 
C)  an adverse opinion. 
D)  a disclaimer of opinion.

Question 16

Which of the following is not a provision of the Sarbanes-Oxley Act of 2002?

Accepted Answer

A)  Congress established the Public Company Accounting Oversight Board, which has the authority to regulate public accounting firms, establishing audit rules and ethics guidelines. 
B)  After five years with a client, the lead audit partner must rotate off the account for at least five years. 
C)  Congress established the American Institute of Certified Public Accountants to develop ethical guidelines in a Code of Professional Conduct. 
D)  Auditors must communicate regularly and completely with audit committees of their clients and must describe options the firm considers in preparing financial statements. 
A)  Congress established the Public Company Accounting Oversight Board, which has the authority to regulate public accounting firms, establishing audit rules and ethics guidelines. 
B)  After five years with a client, the lead audit partner must rotate off the account for at least five years. 
C)  Congress established the American Institute of Certified Public Accountants to develop ethical guidelines in a Code of Professional Conduct. 
D)  Auditors must communicate regularly and completely with audit committees of their clients and must describe options the firm considers in preparing financial statements.

Question 17

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

Accepted Answer

A)  primary liability. 
B)  secondary liability. 
C)  contingent liability. 
D)  rebuttable liability. 
A)  primary liability. 
B)  secondary liability. 
C)  contingent liability. 
D)  rebuttable liability.

Question 18

The IRS files criminal charges against Rich for evasion of federal taxes.Rich's accountant,Sonya,is summoned to appear in court to testify against Rich.The state where the incident occurred recognizes an accountant-client privilege.Does Sonya have to testify in federal court against her client?

Accepted Answer

A)  Yes. 
B)  Yes, but only if she is granted immunity by her state. 
C)  No, the federal court must recognize her state's accountant-client privilege. 
D)  No, the federal accountant-client privilege will protect her from testifying. 
A)  Yes. 
B)  Yes, but only if she is granted immunity by her state. 
C)  No, the federal court must recognize her state's accountant-client privilege. 
D)  No, the federal accountant-client privilege will protect her from testifying.

Question 19

A CPA's duty of care to a client most likely will be breached when the CPA:

Accepted Answer

A)  gives a client an oral report instead of a written report. 
B)  gives a client incorrect advice based on an honest error in judgment. 
C)  fails to give tax advice that would save the client money. 
D)  fails to follow generally accepted auditing standards (GAAS). 
A)  gives a client an oral report instead of a written report. 
B)  gives a client incorrect advice based on an honest error in judgment. 
C)  fails to give tax advice that would save the client money. 
D)  fails to follow generally accepted auditing standards (GAAS).

Question 20

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.Gray & Co.:

Accepted Answer

A)  breached a legal obligation to keep all client information confidential. 
B)  breached a moral, but not a legal, obligation of confidentiality. 
C)  did not breach any obligations to its clients. 
D)  acted properly because it was protecting its client, Regional Bank, from possibly making an unwise loan to Carter Electronics. 
A)  breached a legal obligation to keep all client information confidential. 
B)  breached a moral, but not a legal, obligation of confidentiality. 
C)  did not breach any obligations to its clients. 
D)  acted properly because it was protecting its client, Regional Bank, from possibly making an unwise loan to Carter Electronics.

Exam 27: Accountants' Liability

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

In which of the following cases will the federal accountant-client privilege protect the information from being disclosed?

Halbeck,LLC was negligent in its audit of E-treme,Inc.Unbeknownst to Halbeck,E-treme used the financial statements to secure a loan from Great State Bank.Under the foreseeable doctrine,Halbeck will be liable to Great State Bank for its losses on the loan.

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

A study by the Government Accountability Office found:

An auditor for Ralco Accounting firm was auditing the financial statements of E-prise.The auditor suspected that E-prise was engaged in conduct that violated FCPA,a federal law.Under Section 10A of the 1934 Act,the auditor is required to notify E-prise's board of directors of the suspicions.

Who owns and controls an accountant's working papers?

Halbeck,LLC was negligent in its audit of E-treme,Inc.Unbeknownst to Halbeck,E-treme used the financial statements to secure a loan from Great State Bank.Under the Ultramares doctrine,Halbeck will be liable to Great State Bank for its losses on the loan.

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

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?

An auditor who determines a company is materially misstating certain items on its financial statements should issue:

Which of the following is not a provision of the Sarbanes-Oxley Act of 2002?

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

The IRS files criminal charges against Rich for evasion of federal taxes.Rich's accountant,Sonya,is summoned to appear in court to testify against Rich.The state where the incident occurred recognizes an accountant-client privilege.Does Sonya have to testify in federal court against her client?

A CPA's duty of care to a client most likely will be breached when the CPA:

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.Gray & Co.:

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