Question 1

In some states, in the absence of privity, a party cannot recover from an accountant for negligence.

Accepted Answer

A) True 
 B)False

Question 2

Under the Sarbanes-Oxley Act, accountants must surrender possession of working papers relating to an audit or review to the party for whom the work was performed.

Accepted Answer

A) True 
 B)False

Question 3

Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove​

Accepted Answer

A)  ​only the purchase and sale of a security. 
B)  ​fraud, reliance, materiality, and lack of knowledge about securities. 
C)  ​fraud, reliance, materiality, and incompetence. 
D)  ​fraud, reliance, materiality, causation, and scienter. 
A)  ​only the purchase and sale of a security. 
B)  ​fraud, reliance, materiality, and lack of knowledge about securities. 
C)  ​fraud, reliance, materiality, and incompetence. 
D)  ​fraud, reliance, materiality, causation, and scienter.

Question 4

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is​

Accepted Answer

A)  ​embezzlement. 
B)  ​general misconduct. 
C)  ​professional negligence. 
D)  ​misrepresentation of professional expertise. 
A)  ​embezzlement. 
B)  ​general misconduct. 
C)  ​professional negligence. 
D)  ​misrepresentation of professional expertise.

Question 5

Working papers are the documents through which a court orders an accountant to audit a public company.

Accepted Answer

A) True 
 B)False

Question 6

An accountant is not required to discover every impropriety, defalcation, and fraud in a client's books.

Accepted Answer

A) True 
 B)False

Question 7

Beck is an accountant who prepares her clients' tax returns. Cole is not an accountant, but he also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on​

Accepted Answer

A)  Beck and Cole. 
B)  ​Beck only. 
C)  ​Cole only. 
D)  ​none of the choices. 
A)  Beck and Cole. 
B)  ​Beck only. 
C)  ​Cole only. 
D)  ​none of the choices.

Question 8

Finola, a certified public accountant, provides accounting services to Global Trade Corporation. The services include preparing Global Trade's financial reports and issuing opinion letters based on the reports. In 2014, Global Trade falls into serious financial trouble, but neither Finola's reports nor her opinion letters indicate this situation. Relying on Finola's portrayal of Global Trade's financial situation, the firm borrows a large sum of money to build a new shipping facility. In lending Global Trade the money, Harbor City Bank relies on Finola's opinion letter. Finola is aware of this reliance. If Finola did not engage in intentional fraud but was negligent, what is her potential liability?​

Accepted Answer

Regarding the accountant's potential lia

Question 9

Hernando, an accountant, helps Industrial Equipment & Supplies Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is​

Accepted Answer

A)  ​a felony punishable by a fine and imprisonment. 
B)  ​no violation. 
C)  ​a misdemeanor punishable only by a fine. 
D)  ​a civil violation subject to a liability suit but not a crime. 
A)  ​a felony punishable by a fine and imprisonment. 
B)  ​no violation. 
C)  ​a misdemeanor punishable only by a fine. 
D)  ​a civil violation subject to a liability suit but not a crime.

Question 10

Odell, an accountant, prepares for Pronto Tacos Corporation a financial statement that omits a material fact. The financial statement is included in Pronto Tacos's registration statement, which Qiana reads. Qiana buys Pronto Tacos stock. Under Section 11 of the Securities Act of 1933, for Odell to be liable for the omission, Qiana must show that she​ ​

Accepted Answer

A)  relied on the omission. 
B)  ​suffered a loss on the stock. 
C)  ​knew about the omission before making her purchase. 
D)  ​is a sophisticated investor. 
A)  relied on the omission. 
B)  ​suffered a loss on the stock. 
C)  ​knew about the omission before making her purchase. 
D)  ​is a sophisticated investor.

Question 11

Under the Sarbanes-Oxley Act, accountants need not retain working papers relating to an audit or review.

Accepted Answer

A) True 
 B)False

Question 12

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and

Accepted Answer

A)  ​any third party. 
B)  ​no third party with whom the accountant is not in privity or "near privity." 
C)  ​third parties who are foreseen users of the work. 
D)  ​third parties who are reasonably foreseeable users of the work. 
A)  ​any third party. 
B)  ​no third party with whom the accountant is not in privity or "near privity." 
C)  ​third parties who are foreseen users of the work. 
D)  ​third parties who are reasonably foreseeable users of the work.

Question 13

In all states, communications between an accountant and his or her client are privileged.

Accepted Answer

A) True 
 B)False

Question 14

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for​

Accepted Answer

A)  ​actual fraud. 
B)  ​constructive fraud. 
C)  ​destructive fraud. 
D)  ​virtual fraud. 
A)  ​actual fraud. 
B)  ​constructive fraud. 
C)  ​destructive fraud. 
D)  ​virtual fraud.

Question 15

A professional can be liable for constructive fraud only if he or she acted with fraudulent intent.

Accepted Answer

A) True 
 B)False

Question 16

An accountant's liability under the Securities Act of 1933 requires privity of contract with the purchaser of a security.

Accepted Answer

A) True 
 B)False

Question 17

An accountant who performs an audit may be liable for failing to detect misconduct if a normal audit would have revealed it.

Accepted Answer

A) True 
 B)False

Question 18

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with​

Accepted Answer

A)  ​Esteban and Figaro. 
B)  Esteban only. 
C)  ​Figaro only. 
D)  ​none of the choices. 
A)  ​Esteban and Figaro. 
B)  Esteban only. 
C)  ​Figaro only. 
D)  ​none of the choices.

Question 19

Fact Pattern 33-1
​Nelson, an accountant, enters into a contract to provide services to Operational Processes, Inc. (OPI). Nelson does not finish the work within the contract's deadline. This causes OPI to fail to meet certain other deadlines owed to Prime Bank, which results in the firm's payment of penalties to the bank.
-Refer to Fact Pattern 33–1. Nelson is

Accepted Answer

A) liable for breach of contract. 
B) not liable, because Nelson is a professional. 
C) not liable, because Nelson's failure must have been OPI's fault. 
D) not liable, because the work took longer than foreseen. 
A) liable for breach of contract. 
B) not liable, because Nelson is a professional. 
C) not liable, because Nelson's failure must have been OPI's fault. 
D) not liable, because the work took longer than foreseen.

Question 20

Copper Piping Company's liabilities exceed its assets, but its books falsely reflect a positive net worth. Copper hires Dart & Dash, an accounting firm, to prepare a balance sheet, which is certified to show a net worth. Equity Bank relies on the balance sheet to make a loan to Copper. Copper defaults on the loan. Under the Ultramares rule, Dart & Dash is most likely not liable because the firm​

Accepted Answer

A)  ​did not owe a duty of care to any third party. 
B)  ​is not responsible Copper's false books. 
C)  ​finished its work before Copper's loan and default. 
D)  ​was not in privity with Equity. 
A)  ​did not owe a duty of care to any third party. 
B)  ​is not responsible Copper's false books. 
C)  ​finished its work before Copper's loan and default. 
D)  ​was not in privity with Equity.

Exam 33: Liability of Accountants and Other Professionals

In some states, in the absence of privity, a party cannot recover from an accountant for negligence.

Under the Sarbanes-Oxley Act, accountants must surrender possession of working papers relating to an audit or review to the party for whom the work was performed.

Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove​

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is​

Working papers are the documents through which a court orders an accountant to audit a public company.

An accountant is not required to discover every impropriety, defalcation, and fraud in a client's books.

Beck is an accountant who prepares her clients' tax returns. Cole is not an accountant, but he also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on​

Hernando, an accountant, helps Industrial Equipment & Supplies Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is​

Under the Sarbanes-Oxley Act, accountants need not retain working papers relating to an audit or review.

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and

In all states, communications between an accountant and his or her client are privileged.

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for​

A professional can be liable for constructive fraud only if he or she acted with fraudulent intent.

An accountant's liability under the Securities Act of 1933 requires privity of contract with the purchaser of a security.

An accountant who performs an audit may be liable for failing to detect misconduct if a normal audit would have revealed it.

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with​

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Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is

Beck is an accountant who prepares her clients' tax returns. Cole is not an accountant, but he also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on

Hernando, an accountant, helps Industrial Equipment & Supplies Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with