Question 1

Tort actions against CPAs are more common than breach of contract actions because:

Accepted Answer

A) there are more torts than contracts. 
B) the burden of proof is on the auditor rather than on the person suing. 
C) the person suing need prove only negligence. 
D) the amounts recoverable are normally larger. 
A) there are more torts than contracts. 
B) the burden of proof is on the auditor rather than on the person suing. 
C) the person suing need prove only negligence. 
D) the amounts recoverable are normally larger.

Question 2

Discuss the sanctions the Securities and Exchange Commission can impose on auditors.

Accepted Answer

The SEC has the power in certain circums

Question 3

Under the Securities Act of 1933:

Accepted Answer

A) any party who relies on the company's audited financial statements can recover from the auditors. 
B) third-party users must prove that the auditor was negligent. 
C) the burden of proof is on the defendant. 
D) auditors face potential legal exposure for information contained in the Form 10-Q. 
A) any party who relies on the company's audited financial statements can recover from the auditors. 
B) third-party users must prove that the auditor was negligent. 
C) the burden of proof is on the defendant. 
D) auditors face potential legal exposure for information contained in the Form 10-Q.

Question 4

Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff accountant.Elise was negligent while auditing several of the firm's clients.Under these circumstances, which of the following statements is true?

Accepted Answer

A) Elise would have no personal liability for negligence. 
B) Gregory & Hedrick is not liable for Elise's negligence because CPAs are generally considered to be independent contractors. 
C) Gregory & Hedrick would not be liable for Elise's negligence if Elise disobeyed specific instructions in the performance of the audits. 
D) Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work. 
A) Elise would have no personal liability for negligence. 
B) Gregory & Hedrick is not liable for Elise's negligence because CPAs are generally considered to be independent contractors. 
C) Gregory & Hedrick would not be liable for Elise's negligence if Elise disobeyed specific instructions in the performance of the audits. 
D) Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work.

Question 5

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

Question 6

Discuss at least 3 steps the AICPA and the accounting profession as a whole can and are taking to reduce the practitioner's exposure to lawsuits.

Accepted Answer

Steps the profession is taking to reduce

Question 7

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions extends to the firm's assets.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

The Sarbanes-Oxley Act of 2002 makes destruction of audit documentation punishable by up to 10 years in prison.

Accepted Answer

A) True 
 B)False

Question 14

Distinguish between what is meant by business failure and audit failure.

Accepted Answer

Business failure occurs when a business

Question 15

As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller.As a matter of common law, to what extent would Harrison be liable to the Lamp Corp.for losses attributable to the theft?

Accepted Answer

A) He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees. 
B) He would have no liability because privity of contract is lacking. 
C) He would be liable for losses attributable to his negligence. 
D) He would be liable only if it could be proven that he was grossly negligent. 
A) He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees. 
B) He would have no liability because privity of contract is lacking. 
C) He would be liable for losses attributable to his negligence. 
D) He would be liable only if it could be proven that he was grossly negligent.

Question 16

An example of a breach of contract would likely include:

Accepted Answer

A) an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees. 
B) a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. 
C) a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative. 
D) an auditor's claim that the client staff is unqualified. 
A) an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees. 
B) a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. 
C) a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative. 
D) an auditor's claim that the client staff is unqualified.

Question 17

In an action against a CPA in a jurisdiction that follows the Ultramares doctrine, lack of privity is a viable defense provided the plaintiff:

Accepted Answer

A) is the client's creditor who sued the CPA for negligence. 
B) can prove gross negligence. 
C) violated the Securities Act of 1933. 
D) violated the Securities Act of 1934. 
A) is the client's creditor who sued the CPA for negligence. 
B) can prove gross negligence. 
C) violated the Securities Act of 1933. 
D) violated the Securities Act of 1934.

Question 18

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 19

Which of the following is an illustration of liability to clients under common law?

Accepted Answer

A) Client sues auditor for not discovering a theft of assets by an employee. 
B) Bank sues auditor for not discovering that borrower's financial statements are misstated. 
C) Combined group of stockholders sue auditor for not discovering materially misstated financial statements. 
D) The federal government prosecutes the auditor for knowingly issuing an incorrect audit report. 
A) Client sues auditor for not discovering a theft of assets by an employee. 
B) Bank sues auditor for not discovering that borrower's financial statements are misstated. 
C) Combined group of stockholders sue auditor for not discovering materially misstated financial statements. 
D) The federal government prosecutes the auditor for knowingly issuing an incorrect audit report.

Question 20

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.

Exam 5: Legal Liability

Tort actions against CPAs are more common than breach of contract actions because:

Discuss the sanctions the Securities and Exchange Commission can impose on auditors.

Under the Securities Act of 1933:

Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff accountant.Elise was negligent while auditing several of the firm's clients.Under these circumstances, which of the following statements is true?

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

Discuss at least 3 steps the AICPA and the accounting profession as a whole can and are taking to reduce the practitioner's exposure to lawsuits.

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Privity of contract exists between:

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

In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions extends to the firm's assets.

The major conclusion of the 1931 Ultramares case was that:

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

The Sarbanes-Oxley Act of 2002 makes destruction of audit documentation punishable by up to 10 years in prison.

Distinguish between what is meant by business failure and audit failure.

An example of a breach of contract would likely include:

In an action against a CPA in a jurisdiction that follows the Ultramares doctrine, lack of privity is a viable defense provided the plaintiff:

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

Which of the following is an illustration of liability to clients under common law?

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

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