Question 1

Many litigation experts believe that a well written engagement letter significantly reduces the likelihood of adverse legal actions.

Accepted Answer

A) True 
 B)False

Question 2

An example of auditor legal liability to third parties under common law would be the federal government prosecuting an auditor for knowingly issuing an incorrect audit report.

Accepted Answer

A) True 
 B)False

Question 3

While the Foreign Corrupt Practices Act of 1977 remains in effect,its internal control provisions have been largely superseded by which of the following?

Accepted Answer

A) Sarbanes-Oxley Act of 2002 
B) Racketeer Influenced and Corrupt Organization Act 
C) Federal False Statements Statute 
D) Federal Mail Fraud Statute 
A) Sarbanes-Oxley Act of 2002 
B) Racketeer Influenced and Corrupt Organization Act 
C) Federal False Statements Statute 
D) Federal Mail Fraud Statute

Question 4

Several states have statutes that permit privileged communication between the client and auditor,allowing a CPA to refuse to testify in state and federal courts.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements about the Securities Act of 1933 is not True?

Accepted Answer

A) A third party that purchased securities described in the registration statement may sue the auditor for material misrepresentations or omissions in the audited financial statements. 
B) A third party user does not have the burden of proof that he/she relied on the financial statements. 
C) A third party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit. 
D) A third party user does not have the burden of proof that the loss was caused by the misleading statements. 
A) A third party that purchased securities described in the registration statement may sue the auditor for material misrepresentations or omissions in the audited financial statements. 
B) A third party user does not have the burden of proof that he/she relied on the financial statements. 
C) A third party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit. 
D) A third party user does not have the burden of proof that the loss was caused by the misleading statements.

Question 6

The major conclusion of the 1931 Ultramares case was that

Accepted Answer

A) ordinary negligence is insufficient for liability to third parties. 
B) third parties must file criminal charges,not civil charges,against the auditor. 
C) fraud or gross negligence is sufficient for liability to third parties. 
D) auditors have no liabilities to third parties. 
A) ordinary negligence is insufficient for liability to third parties. 
B) third parties must file criminal charges,not civil charges,against the auditor. 
C) fraud or gross negligence is sufficient for liability to third parties. 
D) auditors have no liabilities to third parties.

Question 7

Which of the following most accurately describes constructive 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 8

Which of the auditor's defenses is ordinarily not available when lawsuits are filed by a third party?

Accepted Answer

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

Question 9

An important concept in contract law for accountants to understand is the "third-party beneficiary doctrine." Explain and give an example.

Accepted Answer

A third party who does not have privity

Question 10

The Sarbanes-Oxley Act requires the CEO and CFO of a public company to certify the annual and quarterly financial statements filed with the PCAOB.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following factors does not contribute to the number of lawsuits against auditors?

Accepted Answer

A) large civil court judgments against CPA firms awarded in a few cases 
B) growing awareness of the responsibilities of public accountants by users of financial statements 
C) the simplicity of auditing and accounting functions 
D) an increased consciousness by the SEC for its responsibility for protecting investors' interests 
A) large civil court judgments against CPA firms awarded in a few cases 
B) growing awareness of the responsibilities of public accountants by users of financial statements 
C) the simplicity of auditing and accounting functions 
D) an increased consciousness by the SEC for its responsibility for protecting investors' interests

Question 12

Critical lessons learned after analyzing major criminal cases against auditors include the fact that

Accepted Answer

A) the partner,but not the audit staff,must be independent. 
B) transactions with related parties are an indication of fraud. 
C) an investigation of the integrity of management is an important part of deciding whether to accept a new client. 
D) accounting principles can be relied on exclusively in deciding if the financial statements are fairly presented. 
A) the partner,but not the audit staff,must be independent. 
B) transactions with related parties are an indication of fraud. 
C) an investigation of the integrity of management is an important part of deciding whether to accept a new client. 
D) accounting principles can be relied on exclusively in deciding if the financial statements are fairly presented.

Question 13

Under the Securities Exchange Act of 1934,which type of organization is required to submit audited financial statements to the SEC?

Accepted Answer

A) every company with securities traded on national and over-the-counter exchanges 
B) every corporation 
C) every company issuing new securities 
D) every corporation which is chartered by a state government 
A) every company with securities traded on national and over-the-counter exchanges 
B) every corporation 
C) every company issuing new securities 
D) every corporation which is chartered by a state government

Question 14

Under the Ultramares doctrine,ordinary negligence is insufficient for liability to third parties unless the third party is

Accepted Answer

A) a primary beneficiary. 
B) an injured party. 
C) a foreseen user. 
D) a bank. 
A) a primary beneficiary. 
B) an injured party. 
C) a foreseen user. 
D) a bank.

Question 15

Laws that have been passed by the U.S.Congress and other governmental units are

Accepted Answer

A) statutory laws. 
B) judicial laws. 
C) federal laws. 
D) common laws. 
A) statutory laws. 
B) judicial laws. 
C) federal laws. 
D) common laws.

Question 16

The Private Securities Litigation Reform Act of 1995 capped damage awards against auditors to the amount of the audit fees charged.

Accepted Answer

A) True 
 B)False

Question 17

A major purpose of federal securities regulations is to

Accepted Answer

A) provide sufficient reliable information to the investing public who purchase securities in the marketplace. 
B) establish the qualifications for accountants who are members of the profession. 
C) eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public. 
D) provide a set of uniform standards and tests for accountants,attorneys,and others who practice before the Securities and Exchange Commission. 
A) provide sufficient reliable information to the investing public who purchase securities in the marketplace. 
B) establish the qualifications for accountants who are members of the profession. 
C) eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public. 
D) provide a set of uniform standards and tests for accountants,attorneys,and others who practice before the Securities and Exchange Commission.

Question 18

If the CPA negligently failed to properly prepare and file a client's tax return,the CPA may be liable for

Accepted Answer

A) the penalties the client owes the IRS. 
B) the penalties and interest the client owes. 
C) the penalties and interest the client owes,plus the tax preparation fee the CPA charged. 
D) the penalties and interest,the tax preparation fee,and the amount of tax that was underpaid. 
A) the penalties the client owes the IRS. 
B) the penalties and interest the client owes. 
C) the penalties and interest the client owes,plus the tax preparation fee the CPA charged. 
D) the penalties and interest,the tax preparation fee,and the amount of tax that was underpaid.

Question 19

Distinguish between constructive fraud and fraud.

Accepted Answer

Constructive fraud is the existence of e

Question 20

An adequate system of internal control for SEC registrants was originally required by the

Accepted Answer

A) Sarbanes-Oxley Act of 2002. 
B) Securities Act of 1933. 
C) Foreign Corrupt Practices Act of 1977. 
D) Securities Act of 1934. 
A) Sarbanes-Oxley Act of 2002. 
B) Securities Act of 1933. 
C) Foreign Corrupt Practices Act of 1977. 
D) Securities Act of 1934.

Exam 5: Legal Liability

Many litigation experts believe that a well written engagement letter significantly reduces the likelihood of adverse legal actions.

An example of auditor legal liability to third parties under common law would be the federal government prosecuting an auditor for knowingly issuing an incorrect audit report.

While the Foreign Corrupt Practices Act of 1977 remains in effect,its internal control provisions have been largely superseded by which of the following?

Several states have statutes that permit privileged communication between the client and auditor,allowing a CPA to refuse to testify in state and federal courts.

Which of the following statements about the Securities Act of 1933 is not True?

The major conclusion of the 1931 Ultramares case was that

Which of the following most accurately describes constructive fraud?

Which of the auditor's defenses is ordinarily not available when lawsuits are filed by a third party?

An important concept in contract law for accountants to understand is the "third-party beneficiary doctrine." Explain and give an example.

The Sarbanes-Oxley Act requires the CEO and CFO of a public company to certify the annual and quarterly financial statements filed with the PCAOB.

Which of the following factors does not contribute to the number of lawsuits against auditors?

Critical lessons learned after analyzing major criminal cases against auditors include the fact that

Under the Securities Exchange Act of 1934,which type of organization is required to submit audited financial statements to the SEC?

Under the Ultramares doctrine,ordinary negligence is insufficient for liability to third parties unless the third party is

Laws that have been passed by the U.S.Congress and other governmental units are

The Private Securities Litigation Reform Act of 1995 capped damage awards against auditors to the amount of the audit fees charged.

A major purpose of federal securities regulations is to

If the CPA negligently failed to properly prepare and file a client's tax return,the CPA may be liable for

Distinguish between constructive fraud and fraud.

An adequate system of internal control for SEC registrants was originally required by the

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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