Question 1

While the Foreign Corrupt Practices Act of 1977 remains in effect, its internal control provisions have been largely superseded by which of the following?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) The Sarbanes-Oxley Act of 2002 
B) The Racketeer Influenced and Corrupt Organization Act 
C) The Federal False Statements Statute 
D) The Federal Mail Fraud Statute 
A) The Sarbanes-Oxley Act of 2002 
B) The Racketeer Influenced and Corrupt Organization Act 
C) The Federal False Statements Statute 
D) The Federal Mail Fraud Statute A

Question 2

The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called:

Accepted Answer

A) separate and proportionate liability. 
B) joint and several liability. 
C) shared liability. 
D) unitary liability. 
A) separate and proportionate liability. 
B) joint and several liability. 
C) shared liability. 
D) unitary liability. A

Question 3

The only parties who can recover from auditors under the Securities Act of 1933 are original purchasers of securities.

Accepted Answer

A) True 
 B)False  True

Question 4

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 5

The laws that have been developed through court decisions are called:

Accepted Answer

A) common laws. 
B) criminal laws. 
C) statutory laws. 
D) civil laws. 
A) common laws. 
B) criminal laws. 
C) statutory laws. 
D) civil laws.

Question 6

Under the Securities Act of 1933, a third party plaintiff does not have the burden of proof that he or she relied on the financial statements or that the auditor was negligent or fraudulent in doing the audit.Rather, the plaintiff need only prove that the audited financial statements contained a material misrepresentation or omission.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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

Accepted Answer

A) True 
 B)False

Question 9

Three approaches to the application of the foreseen users' concept are (1)the Credit Alliance approach, (2)the restatement of torts approach, and (3)the foreseeable user approach.Summarize each of these three approaches.

Accepted Answer

The Credit Alliance approach upholds the

Question 10

One of the changes in auditing procedure 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 11

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 12

The United States Supreme Court has ruled that outside professionals such as accountants who don't help run corrupt businesses cannot be sued under the provisions of the Foreign Corrupt Practices Act.

Accepted Answer

A) True 
 B)False

Question 13

Fraud occurs when:

Accepted Answer

A) a misstatement is made and there is both knowledge of its falsity and the intent to deceive. 
B) a misstatement is made and there is knowledge of its falsity but no intent to deceive. 
C) the auditor lacks even slight care in the performance in performing the audit. 
D) the auditor has an absence of reasonable care in the performance of the audit. 
A) a misstatement is made and there is both knowledge of its falsity and the intent to deceive. 
B) a misstatement is made and there is knowledge of its falsity but no intent to deceive. 
C) the auditor lacks even slight care in the performance in performing the audit. 
D) the auditor has an absence of reasonable care in the performance of the audit.

Question 14

The most significant audit issue that came as a result of the court decision in the Escott et al.v.Bar Chris Construction Corporation case in 1968 was:

Accepted Answer

A) the court's reaffirmation that the burden of proof was on the plaintiff to prove the auditor was negligent. 
B) the affirmation of the increased auditor's responsibility when performing an S-1 review, a review of events subsequent to the balance sheet, for registration statements. 
C) the increased auditor responsibility when associated with unaudited financial statements. 
D) the court's refusal to allow the percentage-of-completion method of accounting for revenues. 
A) the court's reaffirmation that the burden of proof was on the plaintiff to prove the auditor was negligent. 
B) the affirmation of the increased auditor's responsibility when performing an S-1 review, a review of events subsequent to the balance sheet, for registration statements. 
C) the increased auditor responsibility when associated with unaudited financial statements. 
D) the court's refusal to allow the percentage-of-completion method of accounting for revenues.

Question 15

CPAs can be held liable for criminal activity under both state and federal laws.Infamous cases have involved United States vs.Natelli and ESM Government Securities v.Alexander Grant and Co.Discuss what occurred and prepare a summary of the court findings.

Accepted Answer

Natelli-two auditors were convicted of c

Question 16

Match between columns
                        Premises: An auditor's legal defense under which the auditor claims that the audit was performed in accordance with generally accepted auditing standards.
A federal statute dealing with companies that trade securities on national and over-the-counter exchanges.Auditors are involved because the annual reporting requirements include audited financial statements.
A situation in which an incorrect audit opinion is issued because it failed to comply with the requirements of auditing standards.
A federal statute that makes it illegal to offer a bribe to an official of a foreign country.
An auditor's legal defense under which the auditor claims that the client's own actions either resulted in the loss that is the basis for damages or interfered with the conduct of the audit in such a way that prevented the auditor from discovering the cause of the loss.
A federal statute designed to significantly reduce the potential damages in federal securities-related litigation by providing for proportionate liability in most cases.
A common-law approach to third-party liability in which ordinary negligence is insufficient for liability to third parties because of the lack of privity of contract between the third-party and the auditor unless the third-party is a primary beneficiary.
An auditor's legal defense under which the auditor claims that the failure to follow auditing standards did not cause the damages suffered by the client.

Accepted Answer

The Answer of Securities Litigation Uniform Standards Act of 1998 is...

Question 17

The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties, an auditor (1)must know and intend that the work product would be used by the third-party for a specific purpose, and (2)the knowledge and intent must be evidenced by the auditor's conduct.

Accepted Answer

A) True 
 B)False

Question 18

Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users.This description is the legal term for:

Accepted Answer

A) ordinary negligence. 
B) gross negligence. 
C) constructive fraud. 
D) fraud. 
A) ordinary negligence. 
B) gross negligence. 
C) constructive fraud. 
D) fraud.

Question 19

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

Question 20

Discuss three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

Accepted Answer

Major factors include:
•The growing awar

Exam 5: Legal Liability

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

The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called:

The only parties who can recover from auditors under the Securities Act of 1933 are original purchasers of securities.

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

The laws that have been developed through court decisions are called:

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

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

Three approaches to the application of the foreseen users' concept are (1)the Credit Alliance approach, (2)the restatement of torts approach, and (3)the foreseeable user approach.Summarize each of these three approaches.

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

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

The United States Supreme Court has ruled that outside professionals such as accountants who don't help run corrupt businesses cannot be sued under the provisions of the Foreign Corrupt Practices Act.

Fraud occurs when:

The most significant audit issue that came as a result of the court decision in the Escott et al.v.Bar Chris Construction Corporation case in 1968 was:

CPAs can be held liable for criminal activity under both state and federal laws.Infamous cases have involved United States vs.Natelli and ESM Government Securities v.Alexander Grant and Co.Discuss what occurred and prepare a summary of the court findings.

The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties, an auditor (1)must know and intend that the work product would be used by the third-party for a specific purpose, and (2)the knowledge and intent must be evidenced by the auditor's conduct.

Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users.This description is the legal term for:

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.

Discuss three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

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

Internal Control, Control Risk, and Section 404 Audits

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

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, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

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

Filters