Question 1

The standard of due care to which the auditor is expected to be held is referred to as the prudent person concept.

Accepted Answer

A) True 
 B)False

Question 2

The auditor generally owes a duty of care to third parties who are part of a limited group of persons whose reliance is "foreseen" by the auditor.

Accepted Answer

A) True 
 B)False

Question 3

Privity of contract exists between

Accepted Answer

A) auditor and the federal government. 
B) auditor and third parties. 
C) auditor and client. 
D) auditor and client attorney. 
A) auditor and the federal government. 
B) auditor and third parties. 
C) auditor and client. 
D) auditor and client attorney.

Question 4

Which of the following is a True statement regarding CPAs' liability?

Accepted Answer

A) The amounts assessed under joint and several liability will not differ significantly from the amounts assessed under separate and proportionate liability. 
B) When lawsuits are brought under the federal securities laws,the joint and several liability approach will always apply. 
C) If one owner was directly involved in the actions of the owner causing the liability,the personal assets of neither owner can be subject to the damages that arise. 
D) Under the federal statutes,the amount of damages under separate and proportionate liability can be increased if the main defendant is insolvent. 
A) The amounts assessed under joint and several liability will not differ significantly from the amounts assessed under separate and proportionate liability. 
B) When lawsuits are brought under the federal securities laws,the joint and several liability approach will always apply. 
C) If one owner was directly involved in the actions of the owner causing the liability,the personal assets of neither owner can be subject to the damages that arise. 
D) Under the federal statutes,the amount of damages under separate and proportionate liability can be increased if the main defendant is insolvent.

Question 5

The defense of contributory negligence by a third party is often used by auditors if charged with a violation of the 1934 Securities Act.

Accepted Answer

A) True 
 B)False

Question 6

Companies with securities traded on national and over-the-counter exchanges are required to submit audited financial statements once every three years to the Securities and Exchange Commission.

Accepted Answer

A) True 
 B)False

Question 7

The King Surety Company wrote a general fidelity bond covering thefts of assets by the employees of Wilson,Inc.Thereafter,Cooney,an employee of Wilson,embezzled $17,200 of company funds.When the activities were discovered,King paid Wilson the full amount in accordance with the terms of the fidelity bond,and then sought recovery against Wilson's auditors,Lynch & Merritt,CPAs.Which of the following would be Lynch & Merritt's best defense?

Accepted Answer

A) King is not in privity of contract. 
B) The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards. 
C) Lynch & Merritt were not guilty either of gross negligence or fraud. 
D) Lynch & Merritt were not aware of the King-Wilson surety relationship. 
A) King is not in privity of contract. 
B) The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards. 
C) Lynch & Merritt were not guilty either of gross negligence or fraud. 
D) Lynch & Merritt were not aware of the King-Wilson surety relationship.

Question 8

One significant result of the Escott et al.v.BarChris Construction Corporation case was

Accepted Answer

A) a greater emphasis on subsequent events procedures. 
B) new standards for unaudited statements. 
C) a broader definition of third party beneficiaries. 
D) a requirement that more companies file annual reports with the SEC. 
A) a greater emphasis on subsequent events procedures. 
B) new standards for unaudited statements. 
C) a broader definition of third party beneficiaries. 
D) a requirement that more companies file annual reports with the SEC.

Question 9

The Securities and Exchange Commission can impose all but which of the following sanctions?

Accepted Answer

A) suspend a CPA from auditing SEC clients 
B) prohibit a CPA from accepting new SEC clients for a period of time 
C) require a CPA to participate in continuing-education programs and make changes in their practice 
D) revoke a CPA license 
A) suspend a CPA from auditing SEC clients 
B) prohibit a CPA from accepting new SEC clients for a period of time 
C) require a CPA to participate in continuing-education programs and make changes in their practice 
D) revoke a CPA license

Question 10

The U.S.Supreme Court ruled in 1976 in Hochfelder v.Ernst & Ernst that before CPAs could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934,the auditor's ________ would be required to be shown to the court.

Accepted Answer

A) ordinary negligence 
B) gross negligence 
C) knowledge and intent to deceive 
D) financial gain at the expense of the plaintiff 
A) ordinary negligence 
B) gross negligence 
C) knowledge and intent to deceive 
D) financial gain at the expense of the plaintiff

Question 11

Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?

Accepted Answer

A) Private Securities Litigation Reform Act 
B) Public Securities Damages and Settlements Act 
C) Racketeer Influenced and Corrupt Organization Act 
D) U)S.Securities Claims Reform Act 
A) Private Securities Litigation Reform Act 
B) Public Securities Damages and Settlements Act 
C) Racketeer Influenced and Corrupt Organization Act 
D) U)S.Securities Claims Reform Act

Question 12

Discuss some of the steps practicing auditors can take to minimize their legal liability.

Accepted Answer

There are many steps individual practiti

Question 13

In order to protect themselves from legal liability,it is important that CPAs

Accepted Answer

A) are organized as sole-proprietors. 
B) accept client representations. 
C) understand the client's business. 
D) use engagement letters,not representation letters. 
A) are organized as sole-proprietors. 
B) accept client representations. 
C) understand the client's business. 
D) use engagement letters,not representation letters.

Question 14

Under common law,an individual or company that (1)does not have a contract with an auditor,(2)is known by the auditor in advance of the audit,and (3)will use the auditor's report to make decisions about the client company has:

Accepted Answer

A) no rights unless an auditor is grossly negligent. 
B) no rights unless an auditor is fraudulent. 
C) no rights against an auditor. 
D) the same rights against an auditor as a client. 
A) no rights unless an auditor is grossly negligent. 
B) no rights unless an auditor is fraudulent. 
C) no rights against an auditor. 
D) the same rights against an auditor as a client.

Question 15

One of the changes in auditing procedures which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using

Accepted Answer

A) letters of representation. 
B) confirmation letters. 
C) engagement letters. 
D) billet doux letters. 
A) letters of representation. 
B) confirmation letters. 
C) engagement letters. 
D) billet doux letters.

Question 16

A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated.This is an example of which of the following legal liability concepts?

Accepted Answer

A) liability to clients 
B) liability to third parties under common law 
C) civil liability under federal securities law 
D) criminal liability 
A) liability to clients 
B) liability to third parties under common law 
C) civil liability under federal securities law 
D) criminal liability

Question 17

If an auditor is unsuccessful in using the lack of duty defense to have a case dismissed in a third-party suit,the preferred defense is

Accepted Answer

A) lack of duty to perform. 
B) nonnegligent performance. 
C) absence of causal connection. 
D) client fraud. 
A) lack of duty to perform. 
B) nonnegligent performance. 
C) absence of causal connection. 
D) client fraud.

Question 18

An individual who is not party to the contract between a CPA and the client,but who is known by both and is intended to receive certain benefits from the contract is known as

Accepted Answer

A) a third party. 
B) a common law inheritor. 
C) a tort. 
D) a third-party beneficiary. 
A) a third party. 
B) a common law inheritor. 
C) a tort. 
D) a third-party beneficiary.

Question 19

Under the Securities Act of 1933,the auditor's responsibility for making sure the financial statements were fairly stated extends to

Accepted Answer

A) the date of the financial statements. 
B) the date the registration statement becomes effective. 
C) the date of the audit report. 
D) one year beyond the date of the financial statements. 
A) the date of the financial statements. 
B) the date the registration statement becomes effective. 
C) the date of the audit report. 
D) one year beyond the date of the financial statements.

Question 20

The same three defenses available to auditors in common lawsuits by third parties-nonnegligent performance,lack of duty,and absence of causal connection-are also available for suits under the Securities Exchange Act of 1934.

Accepted Answer

A) True 
 B)False

Exam 5: Legal Liability

The standard of due care to which the auditor is expected to be held is referred to as the prudent person concept.

The auditor generally owes a duty of care to third parties who are part of a limited group of persons whose reliance is "foreseen" by the auditor.

Privity of contract exists between

Which of the following is a True statement regarding CPAs' liability?

The defense of contributory negligence by a third party is often used by auditors if charged with a violation of the 1934 Securities Act.

Companies with securities traded on national and over-the-counter exchanges are required to submit audited financial statements once every three years to the Securities and Exchange Commission.

One significant result of the Escott et al.v.BarChris Construction Corporation case was

The Securities and Exchange Commission can impose all but which of the following sanctions?

The U.S.Supreme Court ruled in 1976 in Hochfelder v.Ernst & Ernst that before CPAs could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934,the auditor's ________ would be required to be shown to the court.

Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?

Discuss some of the steps practicing auditors can take to minimize their legal liability.

In order to protect themselves from legal liability,it is important that CPAs

Under common law,an individual or company that (1)does not have a contract with an auditor,(2)is known by the auditor in advance of the audit,and (3)will use the auditor's report to make decisions about the client company has:

One of the changes in auditing procedures which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using

A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated.This is an example of which of the following legal liability concepts?

If an auditor is unsuccessful in using the lack of duty defense to have a case dismissed in a third-party suit,the preferred defense is

An individual who is not party to the contract between a CPA and the client,but who is known by both and is intended to receive certain benefits from the contract is known as

Under the Securities Act of 1933,the auditor's responsibility for making sure the financial statements were fairly stated extends to

The same three defenses available to auditors in common lawsuits by third parties-nonnegligent performance,lack of duty,and absence of causal connection-are also available for suits under the Securities Exchange Act of 1934.

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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