Question 1

Which of the following does not contain provisions that may serve as a basis for legal actions against auditors?

Accepted Answer

A)  the Sarbanes-Oxley Act of 2002 
B)  the Securities Act of 1933 
C)  the Securities Act of 1934 
D)  the Dodd-Frank Wall Street Reform and Consumer Protection Act 
A)  the Sarbanes-Oxley Act of 2002 
B)  the Securities Act of 1933 
C)  the Securities Act of 1934 
D)  the Dodd-Frank Wall Street Reform and Consumer Protection Act

Question 2

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 3

There has been, and continues to be, legislative efforts to control litigation costs against CPA firms by discouraging nonmeritorious lawsuits.

Accepted Answer

A) True 
 B)False

Question 4

Distinguish between constructive fraud and fraud.

Accepted Answer

Constructive fraud is the existence of e

Question 5

In the auditing environment, failure to meet auditing standards is often

Accepted Answer

A)  an accepted practice. 
B)  a suggestion of negligence. 
C)  conclusive evidence of negligence. 
D)  tantamount to criminal behavior. 
A)  an accepted practice. 
B)  a suggestion of negligence. 
C)  conclusive evidence of negligence. 
D)  tantamount to criminal behavior.

Question 6

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 7

Which of the following is an accurate statement regarding audit risk, audit failure, and business failure?

Accepted Answer

A)  Audit risk is always avoidable if the audit is conducted in accordance with generally accepted auditing standards. 
B)  Because auditors gather evidence on a test basis, and because well-concealed frauds are difficult to detect, audit risk is unavoidable. 
C)  Legal precedent makes it easy to determine who has the right to recover losses in the event of an audit failure. 
D)  A business failure will always result in an audit failure. 
A)  Audit risk is always avoidable if the audit is conducted in accordance with generally accepted auditing standards. 
B)  Because auditors gather evidence on a test basis, and because well-concealed frauds are difficult to detect, audit risk is unavoidable. 
C)  Legal precedent makes it easy to determine who has the right to recover losses in the event of an audit failure. 
D)  A business failure will always result in an audit failure.

Question 8

Many CPA firms have strategically decided to settle lawsuits brought against them out of court in order to avoid adverse publicity and costly legal fees.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

The SEC has the power in certain circums

Question 10

Which of the following is a true statement regarding auditors' liability?

Accepted Answer

A)  The level of care is easy to determine in a review or compilation. 
B)  Engagement letters will relieve the auditor of all liability. 
C)  An auditor will always be guilty of negligence if they fail to uncover fraud. 
D)  The most common source of lawsuits against CPAs is from clients. 
A)  The level of care is easy to determine in a review or compilation. 
B)  Engagement letters will relieve the auditor of all liability. 
C)  An auditor will always be guilty of negligence if they fail to uncover fraud. 
D)  The most common source of lawsuits against CPAs is from clients.

Question 11

Which of the following most accurately describes 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 12

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

Accepted Answer

A) True 
 B)False

Question 13

The principal issue in cases involving alleged negligence is usually

Accepted Answer

A)  if 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 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 14

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 15

In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions does not extend to another partner's personal assets.

Accepted Answer

A) True 
 B)False

Question 16

An adequate system of internal control for SEC registrants was originally required by the

Accepted Answer

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

Question 17

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 18

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

Accepted Answer

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

Question 19

If an auditor is unsuccessful in using the lack of duty defense to have a case dismissed in a third-party suit, the preferred defense is

Accepted Answer

A)  lack of duty to perform. 
B)  nonnegligent performance. 
C)  absence of causal connection. 
D)  client fraud. 
A)  lack of duty to perform. 
B)  nonnegligent performance. 
C)  absence of causal connection. 
D)  client fraud.

Question 20

The same defenses available to auditors under common-law suits filed by third parties-nonnegligent performance, lack of duty, and absence of causal connection-are not available to auditors for lawsuits under the Securities Act of 1934.

Accepted Answer

A) True 
 B)False

Exam 5: Legal Liability

Which of the following does not contain provisions that may serve as a basis for legal actions against auditors?

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.

There has been, and continues to be, legislative efforts to control litigation costs against CPA firms by discouraging nonmeritorious lawsuits.

Distinguish between constructive fraud and fraud.

In the auditing environment, failure to meet auditing standards is often

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.

Which of the following is an accurate statement regarding audit risk, audit failure, and business failure?

Many CPA firms have strategically decided to settle lawsuits brought against them out of court in order to avoid adverse publicity and costly legal fees.

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

Which of the following is a true statement regarding auditors' liability?

Which of the following most accurately describes fraud?

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

The principal issue in cases involving alleged negligence is usually

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

In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions does not extend to another partner's personal assets.

An adequate system of internal control for SEC registrants was originally required by the

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?

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

If an auditor is unsuccessful in using the lack of duty defense to have a case dismissed in a third-party suit, the preferred defense is

The same defenses available to auditors under common-law suits filed by third parties-nonnegligent performance, lack of duty, and absence of causal connection-are not available to auditors for lawsuits under the Securities Act of 1934.

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Materiality

Assessing the Risk of Material Misstatement

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

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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