Question 1

Which of the following is accurate with respect to litigation involving CPAs?

Accepted Answer

A) A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that company. 
B) A CPA may not successfully assert as a defense that the CPA had no motive to be part of a fraud. 
C) A CPA may be exposed to criminal as well as civil liability. 
D) A CPA is primarily responsible,while the client is secondarily responsible for the notes in an annual report filed with the SEC. 
A) A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that company. 
B) A CPA may not successfully assert as a defense that the CPA had no motive to be part of a fraud. 
C) A CPA may be exposed to criminal as well as civil liability. 
D) A CPA is primarily responsible,while the client is secondarily responsible for the notes in an annual report filed with the SEC.

Question 2

Which of the following forms of organization is most likely to protect the personal assets of any partner,or shareholder who has not been involved on an engagement resulting in litigation?

Accepted Answer

A) Professional corporation. 
B) Limited liability partnership. 
C) Partnership. 
D) Subchapter M Incorporation. 
A) Professional corporation. 
B) Limited liability partnership. 
C) Partnership. 
D) Subchapter M Incorporation.

Question 3

Under which act (or acts)may criminal charges against a CPA be filed? $\begin{array}{lll}&\text { Securities Act of } 1933&\text { Securities Exchange Act of } 1934\
\text { A } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 4

Under the Ultramares rule,to which of the following parties will an accountant be liable for ordinary negligence?

$\begin{array} { l c c } 
&\text { Parties in privity} & \text {Foreseen parties } \
\text { A } & \text { Yes } & \text { Yes } \ \text { B. } & \text { Yes } & \text { No } \ \text { C. } & \text { No } & \text { Yes } \ \text { D. } & \text { No } & \text { No } \end{array}$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 5

The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be:

Accepted Answer

A) Less than the Securities Act of 1933. 
B) The same as the Securities Act of 1933. 
C) Greater than the Securities Act of 1933. 
D) Indeterminate in relation to the Securities Act of 1933. 
A) Less than the Securities Act of 1933. 
B) The same as the Securities Act of 1933. 
C) Greater than the Securities Act of 1933. 
D) Indeterminate in relation to the Securities Act of 1933.

Question 6

A limited liability partnership form of organization:

Accepted Answer

A) Decreases liability of all partners of a CPA firm. 
B) Has similar liability requirements to that of a professional corporation. 
C) Eliminates personal liability for some,but not all,partners. 
D) Eliminates personal liability for all partners. 
A) Decreases liability of all partners of a CPA firm. 
B) Has similar liability requirements to that of a professional corporation. 
C) Eliminates personal liability for some,but not all,partners. 
D) Eliminates personal liability for all partners.

Question 7

In which type of court case is proving "due diligence" essential to the auditors' defense?

Accepted Answer

A) Court cases brought under the Securities Exchange Act of 1934. 
B) Court cases brought by clients under common law. 
C) Court cases brought by third parties under common law. 
D) Court cases brought under the Securities Act of 1933. 
A) Court cases brought under the Securities Exchange Act of 1934. 
B) Court cases brought by clients under common law. 
C) Court cases brought by third parties under common law. 
D) Court cases brought under the Securities Act of 1933.

Question 8

The precedent set by the Ernst & Ernst v.Hochfelder case is generally believed to have increased auditors' legal liability.

Accepted Answer

A) True 
 B)False

Question 9

Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?

Accepted Answer

A) Ultramares v.Touche. 
B) Restatement of Torts. 
C) Rule 10b-5. 
D) Rosenblum v.Adler. 
A) Ultramares v.Touche. 
B) Restatement of Torts. 
C) Rule 10b-5. 
D) Rosenblum v.Adler.

Question 10

Assume that $800,000 in damages are awarded to a plaintiff,and the CPA's percentage of responsibility established at 20%,while others are responsible for the other 80%.Assume the others have no financial resources.As a result the CPA has been required to pay the entire $800,000.The auditor's liability is most likely based upon which approach to assessing liability?

Accepted Answer

A) Absolute liability. 
B) Contributory negligence. 
C) Joint and several liability. 
D) Proportional liability. 
A) Absolute liability. 
B) Contributory negligence. 
C) Joint and several liability. 
D) Proportional liability.

Question 11

The auditors can be held liable for negligence in audits of financial statements,but not in reviews of financial statements.

Accepted Answer

A) True 
 B)False

Question 12

Under common law,when performing an audit,a CPA:

Accepted Answer

A) Must exercise the level of care,skill,and judgment expected of a reasonably prudent CPA under the circumstances. 
B) Must strictly adhere to generally accepted accounting principles. 
C) Is strictly liable for failures to discover client fraud. 
D) Is not liable unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards. 
A) Must exercise the level of care,skill,and judgment expected of a reasonably prudent CPA under the circumstances. 
B) Must strictly adhere to generally accepted accounting principles. 
C) Is strictly liable for failures to discover client fraud. 
D) Is not liable unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards.

Question 13

Jones,CPA,is in court defending himself against a lawsuit filed under the 1933 Securities Act.The charges have been filed by purchasers of securities covered under that act.If the purchasers prove their required elements,in general,Jones will have to prove that:

Accepted Answer

A) He is not guilty of gross negligence. 
B) He performed the audit with good faith. 
C) He performed the audit with due diligence. 
D) The plaintiffs did not show him to be negligent. 
A) He is not guilty of gross negligence. 
B) He performed the audit with good faith. 
C) He performed the audit with due diligence. 
D) The plaintiffs did not show him to be negligent.

Question 14

In a common law action against an accountant,lack of privity is a viable defense if the plaintiff:

Accepted Answer

A) Is the client's creditor who sues the accountant for negligence. 
B) Can prove the presence of gross negligence that amounts to a reckless disregard for the truth. 
C) Is the accountant's client. 
D) Bases the action upon fraud. 
A) Is the client's creditor who sues the accountant for negligence. 
B) Can prove the presence of gross negligence that amounts to a reckless disregard for the truth. 
C) Is the accountant's client. 
D) Bases the action upon fraud.

Question 15

Assume that a client has encountered a $800,000 fraud and that the CPA's percentage of responsibility established at 20%,while the company itself was responsible for the other 80%.Under which approach to liability is the CPA most likely to avoid liability entirely?

Accepted Answer

A) Absolute negligence. 
B) Comparative negligence. 
C) Contributory negligence. 
D) Joint Negligence. 
A) Absolute negligence. 
B) Comparative negligence. 
C) Contributory negligence. 
D) Joint Negligence.

Question 16

A principle that may reduce or entirely eliminate auditor liability to a client is:

Accepted Answer

A) Client constructive negligence. 
B) Client contributory negligence. 
C) Auditor ordinary negligence. 
D) Auditor gross negligence. 
A) Client constructive negligence. 
B) Client contributory negligence. 
C) Auditor ordinary negligence. 
D) Auditor gross negligence.

Question 17

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan;the auditor did not know the identity of the bank that would eventually give the loan.Under the foreseeable third party approach,the auditor is generally liable to the bank which subsequently grants the loan for:

Accepted Answer

A) Lack of due diligence. 
B) Lack of good faith. 
C) Gross negligence,but not ordinary negligence. 
D) Either ordinary or gross negligence. 
A) Lack of due diligence. 
B) Lack of good faith. 
C) Gross negligence,but not ordinary negligence. 
D) Either ordinary or gross negligence.

Question 18

Under the Securities Act of 1933,the burden of proof that the plaintiff sustained a loss must be proven by the:

Accepted Answer

A) Plaintiff. 
B) Defendant. 
C) SEC. 
D) Jury. 
A) Plaintiff. 
B) Defendant. 
C) SEC. 
D) Jury.

Question 19

Most charges made against auditors under common law are criminal.

Accepted Answer

A) True 
 B)False

Question 20

In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?

Accepted Answer

A) Rosenblum v.Adler. 
B) Hochfelder v.Ernst. 
C) 1136 Tenants Corporation v.Rothenberg. 
D) Continental Vending. 
A) Rosenblum v.Adler. 
B) Hochfelder v.Ernst. 
C) 1136 Tenants Corporation v.Rothenberg. 
D) Continental Vending.

Which of the following is accurate with respect to litigation involving CPAs?

Which of the following forms of organization is most likely to protect the personal assets of any partner,or shareholder who has not been involved on an engagement resulting in litigation?

Under which act (or acts)may criminal charges against a CPA be filed? Securities Act of 1933 Securities Exchange Act of 1934 A Yes Yes B. Yes No C. No Yes D. No No

Under the Ultramares rule,to which of the following parties will an accountant be liable for ordinary negligence? Parties in privity Foreseen parties A Yes Yes B. Yes No C. No Yes D. No No

The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be:

A limited liability partnership form of organization:

In which type of court case is proving "due diligence" essential to the auditors' defense?

The precedent set by the Ernst & Ernst v.Hochfelder case is generally believed to have increased auditors' legal liability.

Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?

The auditors can be held liable for negligence in audits of financial statements,but not in reviews of financial statements.

Under common law,when performing an audit,a CPA:

Jones,CPA,is in court defending himself against a lawsuit filed under the 1933 Securities Act.The charges have been filed by purchasers of securities covered under that act.If the purchasers prove their required elements,in general,Jones will have to prove that:

In a common law action against an accountant,lack of privity is a viable defense if the plaintiff:

Assume that a client has encountered a $800,000 fraud and that the CPA's percentage of responsibility established at 20%,while the company itself was responsible for the other 80%.Under which approach to liability is the CPA most likely to avoid liability entirely?

A principle that may reduce or entirely eliminate auditor liability to a client is:

Under the Securities Act of 1933,the burden of proof that the plaintiff sustained a loss must be proven by the:

Most charges made against auditors under common law are criminal.

In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Audit Evidence and Documentation

Audit Planning, understanding the Client, assessing Risks, and Responding

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property,plant,and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Reports

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, operational, and Compliance Auditing

Filters

Exam 4: Legal Liability of Cpas

Which of the following is accurate with respect to litigation involving CPAs?

Which of the following forms of organization is most likely to protect the personal assets of any partner,or shareholder who has not been involved on an engagement resulting in litigation?

Under which act (or acts)may criminal charges against a CPA be filed? Securities Act of 1933 Securities Exchange Act of 1934 A Yes Yes B. Yes No C. No Yes D. No No

Under the Ultramares rule,to which of the following parties will an accountant be liable for ordinary negligence? Parties in privity Foreseen parties A Yes Yes B. Yes No C. No Yes D. No No

The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be:

A limited liability partnership form of organization:

In which type of court case is proving "due diligence" essential to the auditors' defense?

The precedent set by the Ernst & Ernst v.Hochfelder case is generally believed to have increased auditors' legal liability.

Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?

The auditors can be held liable for negligence in audits of financial statements,but not in reviews of financial statements.

Under common law,when performing an audit,a CPA:

Jones,CPA,is in court defending himself against a lawsuit filed under the 1933 Securities Act.The charges have been filed by purchasers of securities covered under that act.If the purchasers prove their required elements,in general,Jones will have to prove that:

In a common law action against an accountant,lack of privity is a viable defense if the plaintiff:

Assume that a client has encountered a $800,000 fraud and that the CPA's percentage of responsibility established at 20%,while the company itself was responsible for the other 80%.Under which approach to liability is the CPA most likely to avoid liability entirely?

A principle that may reduce or entirely eliminate auditor liability to a client is:

Under the Securities Act of 1933,the burden of proof that the plaintiff sustained a loss must be proven by the:

Most charges made against auditors under common law are criminal.

In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Audit Evidence and Documentation

Audit Planning, understanding the Client, assessing Risks, and Responding

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property,plant,and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Reports

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, operational, and Compliance Auditing

Filters