Question 1

Most of the major lawsuits against public accounting firms have dealt with

Accepted Answer

A)  audited or unaudited financial statements. 
B)  disputes over income-tax preparation services. 
C)  disputes arising in the performance of management consulting services contracts. 
D)  unaudited financial statements. 
A)  audited or unaudited financial statements. 
B)  disputes over income-tax preparation services. 
C)  disputes arising in the performance of management consulting services contracts. 
D)  unaudited financial statements. A

Question 2

The leading precedent-setting case in third-party liability was a 1931 U.S. case, Ultramares v. Touche. What is the key aspect of this case?

Accepted Answer

A)  To succeed, claimants must be foreseeable users of the audited financial statements that are part of the claim process. 
B)  Ordinary negligence is insufficient for liability to third parties because of lack of privity of contract. 
C)  The auditor must have actual knowledge of the users of the financial statements to establish privity. 
D)  There is no general auditor liability to shareholders, since the loss of equity was suffered by the company. 
A)  To succeed, claimants must be foreseeable users of the audited financial statements that are part of the claim process. 
B)  Ordinary negligence is insufficient for liability to third parties because of lack of privity of contract. 
C)  The auditor must have actual knowledge of the users of the financial statements to establish privity. 
D)  There is no general auditor liability to shareholders, since the loss of equity was suffered by the company. B

Question 3

What are the 6 major factors contributing to the high number of lawsuits against pubic accountants and the high amounts in settlements being awarded to plaintiffs?

Accepted Answer

The six reasons are:
•growing awareness of the responsibilities of public accountants by users of financial statements
•increased consciousness on the part of provincial securities commissions for their responsibility for protecting investors' interests
•increasing complexity of auditing and accounting functions
•tough economic times resulting in business failures, which prompt stakeholders to seek restitution from others, including external auditors
•the common belief that public accounting firms have deep pockets
•many public accounting firms being willing to settle legal problems out of court in order to avoid costly legal fees and adverse publicity

Question 4

Pierre, a CPA, was convicted of stealing money from his clients and deliberately preparing personal tax returns that were false. In addition, Pierre will likely

Accepted Answer

A)  need to take additional training courses to upgrade his tax skills. 
B)  need to defend himself to prove non-negligent performance. 
C)  be charged with misconduct by his professional institution (or order). 
D)  have lack of privity with the federal and provincial tax authorities. 
A)  need to take additional training courses to upgrade his tax skills. 
B)  need to defend himself to prove non-negligent performance. 
C)  be charged with misconduct by his professional institution (or order). 
D)  have lack of privity with the federal and provincial tax authorities.

Question 5

While performing services for their clients, professionals have always had a duty to provide a level of care that is

Accepted Answer

A)  reasonable. 
B)  greater than average. 
C)  superior. 
D)  guaranteed to be free from error. 
A)  reasonable. 
B)  greater than average. 
C)  superior. 
D)  guaranteed to be free from error.

Question 6

What rights do secondary investors (i.e. those who purchase shares after an initial offering) have to sue an auditor?

Accepted Answer

A)  Since they are third-party claimants, they would be part of a limited class of known users. 
B)  They could claim contributory negligence since they had prior information of company results. 
C)  They can sue under provincial legislation without the need to prove reliance. 
D)  Since there is absence of causal connection, they would not be able to sue the auditors. 
A)  Since they are third-party claimants, they would be part of a limited class of known users. 
B)  They could claim contributory negligence since they had prior information of company results. 
C)  They can sue under provincial legislation without the need to prove reliance. 
D)  Since there is absence of causal connection, they would not be able to sue the auditors.

Question 7

Many PAs prepare tax returns for individuals and for corporations. Under what circumstances is liability insurance required to cover the preparation of tax returns?

Accepted Answer

A)  When the PA is a member of a professional accounting association. 
B)  When any number of tax returns are prepared, including no-charge tax returns. 
C)  When fees are being charged and more than a handful of returns are being prepared. 
D)  When the bulk of the PA's income comes from preparing tax returns. 
A)  When the PA is a member of a professional accounting association. 
B)  When any number of tax returns are prepared, including no-charge tax returns. 
C)  When fees are being charged and more than a handful of returns are being prepared. 
D)  When the bulk of the PA's income comes from preparing tax returns.

Question 8

A client is suing a PA firm, claiming that the firm is responsible for the losses suffered from a fraud in the payroll department that was not uncovered during the year-end testing done by the auditor. The auditors did indicate to management that controls over payroll calculations and payments were weak, as there was improper segregation of duties. The auditor's best defence is

Accepted Answer

A)  contributory negligence. 
B)  absence of negligence. 
C)  absence of causal connection. 
D)  no damages. 
A)  contributory negligence. 
B)  absence of negligence. 
C)  absence of causal connection. 
D)  no damages.

Question 9

You are the auditor of Jehello Incorporated, a public company with a December year end. Your firm has audited Jehello for the past three years. The following issues were documented in the working paper files for the prior year audit:
•The company had incurred expenditures of $400 000 related to the development of a new sound system. The large majority of the costs were related to development of software, hardware, and presentation of the results to customers who participated in focus groups. Management had been optimistic that the new sound system would work well, even though focus group results had been poor. These costs had been fully capitalized.
•About 40% of the company's revenues were from one customer. That contract had been due for renewal on May 15, ten days after the audit report had been issued. Documents on file indicated that the customer seemed likely to renew the contract, although quality control disputes were escalating. On May 14, Jehello was informed that the contract would not be renewed.
Jehello has defaulted on its bank loans and the bank is suing you, saying that the financial statements presented last year were false and misleading.
Required:
A) Which defences should the auditor use?
B) Do you believe that the auditor will lose the suit? Why or why not?

Accepted Answer

A)The auditor could argue lack of privit

Question 10

Fabio recently sold his restaurant for $650 000, the value of the net assets as reported on the balance sheet. After the sale, Fabio realized that he could've sold the restaurant for as much as $950 000 as the fair value of the assets was $300 000 higher than what was reported on the balance sheet. Fabio is suing the auditors for his loss. The auditor's best defence is

Accepted Answer

A)  absence of a misstatement. 
B)  lack of duty. 
C)  no damages. 
D)  absence of causal connection. 
A)  absence of a misstatement. 
B)  lack of duty. 
C)  no damages. 
D)  absence of causal connection.

Question 11

In third party suits, when there is a misstatement in the financial statements, which of the auditor's defences usually means non-reliance on the financial statements by the user?

Accepted Answer

A)  lack of duty 
B)  non-negligent performance 
C)  contributory negligence 
D)  absence of causal connections 
A)  lack of duty 
B)  non-negligent performance 
C)  contributory negligence 
D)  absence of causal connections

Question 12

The standard of due care to which the auditor is expected to be held is referred to as the

Accepted Answer

A)  prudent person concept. 
B)  common law doctrine. 
C)  due care concept. 
D)  reckless regard doctrine. 
A)  prudent person concept. 
B)  common law doctrine. 
C)  due care concept. 
D)  reckless regard doctrine.

Question 13

One of the lessons learned from accounting scandals such as Enron's is that generally accepted accounting principles (now under an acceptable financial reporting framework) cannot be relied upon exclusively in deciding whether financial statements are fairly presented. Why is this the case?

Accepted Answer

Student answers may vary.
- GAAP and acc

Question 14

If the public accountant negligently failed to properly prepare and file a client's tax return, the public accountant can be held liable for

Accepted Answer

A)  the penalties the client owes Canada Customs and Revenue Agency. 
B)  the penalties and interest the client owes. 
C)  the penalties and interest, plus the tax preparation fee that the public accountant charged. 
D)  the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid. 
A)  the penalties the client owes Canada Customs and Revenue Agency. 
B)  the penalties and interest the client owes. 
C)  the penalties and interest, plus the tax preparation fee that the public accountant charged. 
D)  the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid.

Question 15

Enron and Equity Funding are companies that suffered from large frauds by corporate management. One important lesson with respect to such cases is that

Accepted Answer

A)  when a company does really well financially it is important to suspect that such results are always inflated. 
B)  an investigation of the integrity of management is an important part of deciding upon the extent of audit work. 
C)  securities and exchange commissions expect auditors to be perfect in their assessment of management. 
D)  partners and staff should cooperate in preparing working papers that prove the accuracy of the financial statements. 
A)  when a company does really well financially it is important to suspect that such results are always inflated. 
B)  an investigation of the integrity of management is an important part of deciding upon the extent of audit work. 
C)  securities and exchange commissions expect auditors to be perfect in their assessment of management. 
D)  partners and staff should cooperate in preparing working papers that prove the accuracy of the financial statements.

Question 16

Danford, a PA, is setting up his accounting firm as a sole practitioner. Which of the following is not an important way that Danford can reduce legal liability with respect to the work completed by his office?

Accepted Answer

A)  participate in the standard-setting process for audit engagements 
B)  find out when his practice is due for practice inspection 
C)  hire only qualified personnel and train them well 
D)  sanction other PAs who engage in improper conduct 
A)  participate in the standard-setting process for audit engagements 
B)  find out when his practice is due for practice inspection 
C)  hire only qualified personnel and train them well 
D)  sanction other PAs who engage in improper conduct

Question 17

An investor suing an auditor for not discovering that the financial statements of a company were materially misstated is an example of

Accepted Answer

A)  criminal liability. 
B)  fiduciary duty. 
C)  third party liability. 
D)  liability to client under common law. 
A)  criminal liability. 
B)  fiduciary duty. 
C)  third party liability. 
D)  liability to client under common law.

Question 18

A common way for a public accounting firm to demonstrate its defence of a lack of duty to perform is by use of a(n)

Accepted Answer

A)  engagement letter. 
B)  letter of representation. 
C)  confirmation letter. 
D)  expert witness. 
A)  engagement letter. 
B)  letter of representation. 
C)  confirmation letter. 
D)  expert witness.

Question 19

There are a number of things that the CPA, representing the profession as a whole, can do to reduce the practitioner's exposure to lawsuits. One of them is to

Accepted Answer

A)  sanction members for improper conduct and performance. 
B)  deal only with clients possessing integrity. 
C)  hire qualified auditors and train and supervise them. 
D)  perform quality audits. 
A)  sanction members for improper conduct and performance. 
B)  deal only with clients possessing integrity. 
C)  hire qualified auditors and train and supervise them. 
D)  perform quality audits.

Question 20

Bigland and Betton, PAs, is being sued by a bank for potential negligence during an audit engagement that was completed over five years ago. Which of the following actions during that audit engagement will help ensure that the suit is fairly assessed?

Accepted Answer

A)  good quality documentation 
B)  honest management at the client 
C)  low employee turnover 
D)  good employee memory of events 
A)  good quality documentation 
B)  honest management at the client 
C)  low employee turnover 
D)  good employee memory of events

Most of the major lawsuits against public accounting firms have dealt with

The leading precedent-setting case in third-party liability was a 1931 U.S. case, Ultramares v. Touche. What is the key aspect of this case?

What are the 6 major factors contributing to the high number of lawsuits against pubic accountants and the high amounts in settlements being awarded to plaintiffs?

Pierre, a CPA, was convicted of stealing money from his clients and deliberately preparing personal tax returns that were false. In addition, Pierre will likely

While performing services for their clients, professionals have always had a duty to provide a level of care that is

What rights do secondary investors (i.e. those who purchase shares after an initial offering) have to sue an auditor?

Many PAs prepare tax returns for individuals and for corporations. Under what circumstances is liability insurance required to cover the preparation of tax returns?

In third party suits, when there is a misstatement in the financial statements, which of the auditor's defences usually means non-reliance on the financial statements by the user?

The standard of due care to which the auditor is expected to be held is referred to as the

One of the lessons learned from accounting scandals such as Enron's is that generally accepted accounting principles (now under an acceptable financial reporting framework) cannot be relied upon exclusively in deciding whether financial statements are fairly presented. Why is this the case?

If the public accountant negligently failed to properly prepare and file a client's tax return, the public accountant can be held liable for

Enron and Equity Funding are companies that suffered from large frauds by corporate management. One important lesson with respect to such cases is that

Danford, a PA, is setting up his accounting firm as a sole practitioner. Which of the following is not an important way that Danford can reduce legal liability with respect to the work completed by his office?

An investor suing an auditor for not discovering that the financial statements of a company were materially misstated is an example of

A common way for a public accounting firm to demonstrate its defence of a lack of duty to perform is by use of a(n)

There are a number of things that the CPA, representing the profession as a whole, can do to reduce the practitioner's exposure to lawsuits. One of them is to

Bigland and Betton, PAs, is being sued by a bank for potential negligence during an audit engagement that was completed over five years ago. Which of the following actions during that audit engagement will help ensure that the suit is fairly assessed?

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Professional Judgment and Ethics

Audit Responsibilities and Objectives

Client Acceptance and Planning the Audit

Materiality and Risk

Internal Controls and Control Risk

Audit Evidence

Audit Strategy and Audit Program

Audit Sampling Concepts

Audit of the Revenue Cycle

Audit of the Acquisition and Payment Cycle

Audit of the Inventory and Distribution Cycle

Audit of the Human Resources and Payroll Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Audit Reports on Financial Statements

Other Assurance and Nonassurance Services

Filters

Exam 3: Legal Liability

Most of the major lawsuits against public accounting firms have dealt with

The leading precedent-setting case in third-party liability was a 1931 U.S. case, Ultramares v. Touche. What is the key aspect of this case?

What are the 6 major factors contributing to the high number of lawsuits against pubic accountants and the high amounts in settlements being awarded to plaintiffs?

Pierre, a CPA, was convicted of stealing money from his clients and deliberately preparing personal tax returns that were false. In addition, Pierre will likely

While performing services for their clients, professionals have always had a duty to provide a level of care that is

What rights do secondary investors (i.e. those who purchase shares after an initial offering) have to sue an auditor?

Many PAs prepare tax returns for individuals and for corporations. Under what circumstances is liability insurance required to cover the preparation of tax returns?

In third party suits, when there is a misstatement in the financial statements, which of the auditor's defences usually means non-reliance on the financial statements by the user?

The standard of due care to which the auditor is expected to be held is referred to as the

One of the lessons learned from accounting scandals such as Enron's is that generally accepted accounting principles (now under an acceptable financial reporting framework) cannot be relied upon exclusively in deciding whether financial statements are fairly presented. Why is this the case?

If the public accountant negligently failed to properly prepare and file a client's tax return, the public accountant can be held liable for

Enron and Equity Funding are companies that suffered from large frauds by corporate management. One important lesson with respect to such cases is that

Danford, a PA, is setting up his accounting firm as a sole practitioner. Which of the following is not an important way that Danford can reduce legal liability with respect to the work completed by his office?

An investor suing an auditor for not discovering that the financial statements of a company were materially misstated is an example of

A common way for a public accounting firm to demonstrate its defence of a lack of duty to perform is by use of a(n)

There are a number of things that the CPA, representing the profession as a whole, can do to reduce the practitioner's exposure to lawsuits. One of them is to

Bigland and Betton, PAs, is being sued by a bank for potential negligence during an audit engagement that was completed over five years ago. Which of the following actions during that audit engagement will help ensure that the suit is fairly assessed?

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Professional Judgment and Ethics

Audit Responsibilities and Objectives

Client Acceptance and Planning the Audit

Materiality and Risk

Internal Controls and Control Risk

Audit Evidence

Audit Strategy and Audit Program

Audit Sampling Concepts

Audit of the Revenue Cycle

Audit of the Acquisition and Payment Cycle

Audit of the Inventory and Distribution Cycle

Audit of the Human Resources and Payroll Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Audit Reports on Financial Statements

Other Assurance and Nonassurance Services

Filters