Question 1

Which of the following statements is true?

Accepted Answer

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

Question 2

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 3

"Absence of reasonable care that can be expected of a person in a set of circumstances" defines:

Accepted Answer

A) pecuniary negligence. 
B) gross negligence. 
C) extreme negligence. 
D) ordinary negligence. 
A) pecuniary negligence. 
B) gross negligence. 
C) extreme negligence. 
D) ordinary negligence.

Question 4

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 5

According to the principle established by the Restatement of Torts case, 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 6

Distinguish between "joint and several liability" and "separate and proportionate liability."

Accepted Answer

Under joint and several liability, the d

Question 7

A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients.Which one of the following is generally not a defense?

Accepted Answer

A) Lack of duty 
B) Nonnegligent performance 
C) Contributory negligence 
D) Foreseeable users 
A) Lack of duty 
B) Nonnegligent performance 
C) Contributory negligence 
D) Foreseeable users

Question 8

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 9

A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.This is known as the concept of:

Accepted Answer

A) foreseen users. 
B) foreseeable users. 
C) expected users. 
D) four-party contracts. 
A) foreseen users. 
B) foreseeable users. 
C) expected users. 
D) four-party contracts.

Question 10

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 11

Under the federal securities acts, one significant result occurring directly due to the Escott et al.v.Bar Chris Construction Corporation case was that SAS was changed to require:

Accepted Answer

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

Question 12

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 13

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 14

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 15

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 16

Matthews & Co., CPAs, issued an unqualified opinion on Dodgers Corporation.Millennium Bank, which relied on the audited financial statements, granted a loan of $200,00,000 to Dodgers Corporation.Dodgers subsequently defaulted on the loan.To succeed in an action against Matthews & Co., Millennium Bank must prove that the bank was:

Accepted Answer

A) in privity of contract with Dodgers. 
B) in privity of contract with Millennium. 
C) free from contributory negligence. 
D) justified in relying on the financial statements in granting the loan. 
A) in privity of contract with Dodgers. 
B) in privity of contract with Millennium. 
C) free from contributory negligence. 
D) justified in relying on the financial statements in granting the loan.

Question 17

Which of the following is an accurate statement regarding recent actions brought against accountants by clients and third parties?

Accepted Answer

A) Litigants will first seek state remedies because of the availability of class-action litigation. 
B) Gross negligence by the auditor must be proven under the Securities Acts of 1933 and 1934. 
C) The greatest growth in CPA liability litigation bas been under the federal securities laws. 
D) The amount of damages that plaintiffs can receive is greater under common law than under the federal securities laws. 
A) Litigants will first seek state remedies because of the availability of class-action litigation. 
B) Gross negligence by the auditor must be proven under the Securities Acts of 1933 and 1934. 
C) The greatest growth in CPA liability litigation bas been under the federal securities laws. 
D) The amount of damages that plaintiffs can receive is greater under common law than under the federal securities laws.

Question 18

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

Accepted Answer

There are many steps individual practiti

Question 19

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

Accepted Answer

A) Lack of duty 
B) Nonnegligent performance 
C) Absence of causal connections 
D) Contributory negligence 
A) Lack of duty 
B) Nonnegligent performance 
C) Absence of causal connections 
D) Contributory negligence

Question 20

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.

Exam 5: Legal Liability

Which of the following statements is true?

The Foreign Corrupt Practices Act (FCPA)of 1977:

"Absence of reasonable care that can be expected of a person in a set of circumstances" defines:

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

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

Distinguish between "joint and several liability" and "separate and proportionate liability."

A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients.Which one of the following is generally not a defense?

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

A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.This is known as the concept of:

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

Under the federal securities acts, one significant result occurring directly due to the Escott et al.v.Bar Chris Construction Corporation case was that SAS was changed to require:

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

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

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.

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:

Which of the following is an accurate statement regarding recent actions brought against accountants by clients and third parties?

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

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

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