Question 1

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 2

The principal issue in cases involving alleged negligence is usually:

Accepted Answer

A) if an an engagement letter was issued. 
B) the level of care required. 
C) if fraud was committed by upper-level management. 
D) whether the auditor is liable under civil or criminal laws. 
A) if an an engagement letter was issued. 
B) the level of care required. 
C) if fraud was committed by upper-level management. 
D) whether the auditor is liable under civil or criminal laws.

Question 3

The increased litigation under the federal securities laws has resulted from:

Accepted Answer

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

Question 4

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 5

The 2012 news of a massive alleged bribery scheme involving Wal-Mart has brought charges against the company under the:

Accepted Answer

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

Question 6

The basic legal concept which was affirmed in the 1985 New York case, Credit Alliance, was that:

Accepted Answer

A) the auditor's defense of privity of contract is still valid against third parties. 
B) the auditor is liable for ordinary negligence to specifically foreseen third parties. 
C) the auditor is liable for ordinary negligence to reasonably foreseeable third parties. 
D) the auditor's defense of contributory negligence is no longer valid. 
A) the auditor's defense of privity of contract is still valid against third parties. 
B) the auditor is liable for ordinary negligence to specifically foreseen third parties. 
C) the auditor is liable for ordinary negligence to reasonably foreseeable third parties. 
D) the auditor's defense of contributory negligence is no longer valid.

Question 7

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 8

In third-party suits, which of the auditor's defenses contends no implied or expressed contract?

Accepted Answer

A) Lack of duty 
B) Non-negligent performance 
C) Contributory negligence 
D) Absence of causal connections 
A) Lack of duty 
B) Non-negligent performance 
C) Contributory negligence 
D) Absence of causal connections

Question 9

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 10

Under common law, a foreseen user would be treated the same as:

Accepted Answer

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

Question 11

Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely.This would not include:

Accepted Answer

A) employees of the CPA firm. 
B) employees of the audit client. 
C) other CPA firms engaged to do part of the audit work. 
D) specialists employed by the CPA firm to provide technical advice on the audit. 
A) employees of the CPA firm. 
B) employees of the audit client. 
C) other CPA firms engaged to do part of the audit work. 
D) specialists employed by the CPA firm to provide technical advice on the audit.

Question 12

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 13

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 14

A(n)________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards.

Accepted Answer

A) business 
B) audit 
C) ethics 
D) process 
A) business 
B) audit 
C) ethics 
D) process

Question 15

In a leading securities law and CPA liabilities case, 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, what would be required to be shown to the court was the auditor's:

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 16

Define ordinary negligence, gross negligence, and constructive fraud.

Accepted Answer

Ordinary negligence is the absence of re

Question 17

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 18

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 19

The restatement of torts approach to the concept of foreseen users states that any users that the auditor should have reasonably been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 5: Legal Liability

A major purpose of federal securities regulations is to:

The principal issue in cases involving alleged negligence is usually:

The increased litigation under the federal securities laws has resulted from:

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

The 2012 news of a massive alleged bribery scheme involving Wal-Mart has brought charges against the company under the:

The basic legal concept which was affirmed in the 1985 New York case, Credit Alliance, was that:

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

In third-party suits, which of the auditor's defenses contends no implied or expressed contract?

Constructive fraud:

Under common law, a foreseen user would be treated the same as:

Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely.This would not include:

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

Which of the following most accurately describes constructive fraud?

A(n)________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards.

In a leading securities law and CPA liabilities case, 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, what would be required to be shown to the court was the auditor's:

Define ordinary negligence, gross negligence, and constructive fraud.

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.

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.

The restatement of torts approach to the concept of foreseen users states that any users that the auditor should have reasonably been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.

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?

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

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