Exam 4: Legal Liability of Cpas

If a CPA recklessly departs from the standards of due care when conducting an audit,the CPA will be liable to third parties who are unknown to the CPA based on:

Auditors may be held liable to both their clients and third parties under common law. a.What must a client prove to recover its losses from the auditors under common law? b.In a court that adheres to the precedent set by the Ultramares v.Touche case,what must an ordinary third party prove to recover losses from the auditors under common law?

Under which act (or acts)must a client prove that a CPA has performed an audit with due diligence to establish that CPA's liability? Securities Act of 1933 Securities Exchange Act of 1934 A Yes Yes B. Yes No C. No Yes D. No No

The Securities Act of 1934 includes provisions for criminal charges against persons violating the Act.

A plaintiff may elect to bring a lawsuit against auditors under applicable statutes-including the Securities Act of 1933 and the Securities Exchange Act of 1934-and under common law.For each circumstance,indicate the most likely source of CPA liability by placing the appropriate letter in the third column. A.The Securities Act of 1933 B.The Securities Exchange Act of 1934 C.Common Law

Which of the following is a correct statement related to CPA legal liability under common law?

Hark,CPA,negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements.Long's president told Hark that the audited financial statements would be submitted to several,at this point undetermined,banks to obtain financing.Relying on the statements,Third Bank gave Long a loan.Long defaulted on the loan.In jurisdiction applying the Ultramares decision,if Third sues Hark,Hark will:

Fleming and Co. ,CPAs,issued an unqualified opinion on the 20X3 financial statements of Walton Corp.Late in 20X4,Walton determined that its controller had embezzled over $2,000,000.Fleming was unaware of the embezzlement.Walton has decided to sue Fleming to recover the $2,000,000.Waltons suit is based upon Fleming's failure to discover the missing money while performing the audit.Which of the following is Fleming's best defense?

The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors.

Under common law,which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?

Negligence is defined as failure to use reasonable care in the performance of services.

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement.Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence?

The Securities Exchange Act of 1933 offers recourse against the auditors to a far greater number of investors than does the Securities Act of 1934.

Bailey CPA,audited Lincoln Corporation.The shareholders sued both Lincoln and Bailey for securities fraud under the Federal Securities Exchange Act of 1934.The court determined that there was securities fraud and that Lincoln was 80% at fault and Bailey was 20% at fault due to her negligence in the audit.Both Lincoln and Bailey are solvent and the damages were determined to be $2 million.What is the maximum liability of Bailey?

A CPA firm has audited the financial statements included in a Form S-1 filed with the SEC under the Securities Act of 1933.Shortly thereafter,the company went bankrupt and a class action lawsuit was filed by the initial investors against the CPA firm. a.What should the plaintiff investors attempt to prove? b.Must the plaintiffs prove that they relied on the financial statements included in the Form S-1? c.What must the CPA firm prove in order to be successful with respect to the firm's defense?

Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for:

Wilson bought Zimmer Corp.common stock in an offering registered under the Securities Act of 1933.Baldridge & Co. ,CPAs,gave an unqualified opinion on Zimmer's financial statements that were included in the registration statement filed with the SEC.Wilson sued Baldridge under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement.Wilson must prove that:

The results of the Continental Vending Corporation case did not result in the criminal prosecution of auditors for gross negligence.

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

The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of: Registered Public Accounting Firms Registered Public Accounting Firm Employees A Yes Yes B. Yes No C. No Yes D. No No