Question 1

Although there is confusion caused by the differing views of liability to third parties under common law,the movement is clearly away from the foreseeable user approach.

Accepted Answer

A) True 
 B)False

Question 2

Gross negligence is the existence of extreme or unusual negligence with the intent to deceive.

Accepted Answer

A) True 
 B)False

Question 3

CPAs can be held liable for criminal activity under both state and federal laws.Infamous cases include United States vs.Natelli and ESM Government Securities v.Alexander Grant and Co.Discuss what occurred in each case.

Accepted Answer

Natelli-two auditors were convicted of c

Question 4

Discuss each of the four defenses a CPA firm can normally use when facing legal claims by clients.

Accepted Answer

Lack of duty.The CPA firm claims that th

Question 5

Audit risk is the risk there will be an audit failure for a given audit engagement.

Accepted Answer

A) True 
 B)False

Question 6

According to the principle established by the Restatement of Torts,foreseen users must be members of

Accepted Answer

A) any potential user group. 
B) a legally protected class. 
C) a reasonably limited and identifiable user group. 
D) a reasonably limited and established user group. 
A) any potential user group. 
B) a legally protected class. 
C) a reasonably limited and identifiable user group. 
D) a reasonably limited and established user group.

Question 7

Which of the following is an illustration of liability under the federal securities acts?

Accepted Answer

A) A client sues the auditor for not discovering a theft of assets by an employee. 
B) A bank sues the auditor for not discovering that the borrower's financial statements are misstated. 
C) A combined group of stockholders sues the auditor for not discovering materially misstated financial statements. 
D) The auditor sues a client for not cooperating during the engagement. 
A) A client sues the auditor for not discovering a theft of assets by an employee. 
B) A bank sues the auditor for not discovering that the borrower's financial statements are misstated. 
C) A combined group of stockholders sues the auditor for not discovering materially misstated financial statements. 
D) The auditor sues a client for not cooperating during the engagement.

Question 8

The increased litigation under the federal securities laws has resulted from

Accepted Answer

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

Question 9

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Accepted Answer

A) True 
 B)False

Question 10

Constructive fraud

Accepted Answer

A) is also known as recklessness. 
B) requires an intent to deceive. 
C) involves collusion with the client. 
D) is also known as breach of contract. 
A) is also known as recklessness. 
B) requires an intent to deceive. 
C) involves collusion with the client. 
D) is also known as breach of contract.

Question 11

The principal issue to be resolved in cases involving alleged negligence is usually

Accepted Answer

A) the amount of the damages suffered by plaintiff. 
B) whether to impose punitive damages on defendant. 
C) the level of care exercised by the CPA. 
D) whether defendant was involved in fraud. 
A) the amount of the damages suffered by plaintiff. 
B) whether to impose punitive damages on defendant. 
C) the level of care exercised by the CPA. 
D) whether defendant was involved in fraud.

Question 12

Which of the following auditor's defenses usually means nonreliance on the financial statements by the user?

Accepted Answer

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

Question 13

In connection with the audit of financial statements,an independent auditor could be responsible for failure to detect a material fraud if

Accepted Answer

A) statistical sampling techniques were not used on the audit engagement. 
B) the auditor planned the audit in a negligent manner. 
C) accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier. 
D) the fraud was perpetrated by one employee who circumvented the existing internal controls. 
A) statistical sampling techniques were not used on the audit engagement. 
B) the auditor planned the audit in a negligent manner. 
C) accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier. 
D) the fraud was perpetrated by one employee who circumvented the existing internal controls.

Question 14

A third-party beneficiary is one which

Accepted Answer

A) has failed to establish legal standing before the court. 
B) does not have privity of contract and is unknown to the contracting parties. 
C) does not have privity of contract,but is known to the contracting parties and intended to benefit under the contract. 
D) may establish legal standing before the court after a contract has been consummated. 
A) has failed to establish legal standing before the court. 
B) does not have privity of contract and is unknown to the contracting parties. 
C) does not have privity of contract,but is known to the contracting parties and intended to benefit under the contract. 
D) may establish legal standing before the court after a contract has been consummated.

Question 15

Which of the following most accurately describes fraud?

Accepted Answer

A) absence of reasonable care 
B) lack of slight care 
C) knowledge and intent to deceive 
D) extreme or unusual negligence without the intent to deceive 
A) absence of reasonable care 
B) lack of slight care 
C) knowledge and intent to deceive 
D) extreme or unusual negligence without the intent to deceive

Question 16

To succeed in an action against the auditor,the client must be able to show that

Accepted Answer

A) the auditor was fraudulent. 
B) the auditor was grossly negligent. 
C) there was a written contract. 
D) there is a close causal connection between the auditor's behavior and the damages suffered by the client. 
A) the auditor was fraudulent. 
B) the auditor was grossly negligent. 
C) there was a written contract. 
D) there is a close causal connection between the auditor's behavior and the damages suffered by the client.

Question 17

Which of the following is an accurate statement regarding Rule 10b-5 of the Securities Exchange Act of 1934?

Accepted Answer

A) The Supreme Court has ruled that liability under Rule 10b-5 does not extend to aiders or abettors who participated in financial statement misstatements that were not the primary defendants. 
B) Federal court decisions have clarified that Rule 10b-5 applies only to direct sellers. 
C) Hochfelder and subsequent court decisions have increased the liability of auditors under Rule 10b-5. 
D) According to most recent court decisions,poor judgment is proof of fraud. 
A) The Supreme Court has ruled that liability under Rule 10b-5 does not extend to aiders or abettors who participated in financial statement misstatements that were not the primary defendants. 
B) Federal court decisions have clarified that Rule 10b-5 applies only to direct sellers. 
C) Hochfelder and subsequent court decisions have increased the liability of auditors under Rule 10b-5. 
D) According to most recent court decisions,poor judgment is proof of fraud.

Question 18

There are four major sources of an auditor's legal liability.One source is liability to the audit client.List the other three sources.

Accepted Answer

The other three sources of aud

Question 19

The Foreign Corrupt Practices Act (FCPA)of 1977

Accepted Answer

A) requires auditors to review and evaluate systems of internal control as a part of an audit. 
B) requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control. 
C) requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA. 
D) requires auditors to file a report with the SEC if client's internal control system is inadequate. 
A) requires auditors to review and evaluate systems of internal control as a part of an audit. 
B) requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control. 
C) requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA. 
D) requires auditors to file a report with the SEC if client's internal control system is inadequate.

Question 20

A group typically included as "third parties" in common law is

Accepted Answer

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

Exam 5: Legal Liability

Although there is confusion caused by the differing views of liability to third parties under common law,the movement is clearly away from the foreseeable user approach.

Gross negligence is the existence of extreme or unusual negligence with the intent to deceive.

CPAs can be held liable for criminal activity under both state and federal laws.Infamous cases include United States vs.Natelli and ESM Government Securities v.Alexander Grant and Co.Discuss what occurred in each case.

Discuss each of the four defenses a CPA firm can normally use when facing legal claims by clients.

Audit risk is the risk there will be an audit failure for a given audit engagement.

According to the principle established by the Restatement of Torts,foreseen users must be members of

Which of the following is an illustration of liability under the federal securities acts?

The increased litigation under the federal securities laws has resulted from

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Constructive fraud

The principal issue to be resolved in cases involving alleged negligence is usually

Which of the following auditor's defenses usually means nonreliance on the financial statements by the user?

In connection with the audit of financial statements,an independent auditor could be responsible for failure to detect a material fraud if

A third-party beneficiary is one which

Which of the following most accurately describes fraud?

To succeed in an action against the auditor,the client must be able to show that

Which of the following is an accurate statement regarding Rule 10b-5 of the Securities Exchange Act of 1934?

There are four major sources of an auditor's legal liability.One source is liability to the audit client.List the other three sources.

The Foreign Corrupt Practices Act (FCPA)of 1977

A group typically included as "third parties" in common law is

The Demand for Audit and Other Assurance Services

The Cpa Profession

Audit Reports

Professional Ethics

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls,

Completing the Tests in the Acquisition and Payment Cycle:

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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