Question 1

One of the changes in auditing procedures which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using

Accepted Answer

A)  letters of representation. 
B)  confirmation letters. 
C)  engagement letters. 
D)  billet doux letters. 
A)  letters of representation. 
B)  confirmation letters. 
C)  engagement letters. 
D)  billet doux letters.

Question 2

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 3

Discuss each of the four defenses a CPA firm can normally use when facing legal claims by clients.

Accepted Answer

Lack of duty. The CPA firm claims that t

Question 4

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 5

Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is an accurate statement regarding Rule 10b-5 of the Securities Exchange Act of 1934?

Accepted Answer

A)  The Supreme Court has ruled that liability under Rule 10b-5 does not extend to aiders or abettors who participated in financial statement misstatements that were not the primary defendants. 
B)  Federal court decisions have clarified that Rule 10b-5 applies only to direct sellers. 
C)  Hochfelder and subsequent court decisions have increased the liability of auditors under Rule 10b-5. 
D)  According to most recent court decisions, poor judgment is proof of fraud. 
A)  The Supreme Court has ruled that liability under Rule 10b-5 does not extend to aiders or abettors who participated in financial statement misstatements that were not the primary defendants. 
B)  Federal court decisions have clarified that Rule 10b-5 applies only to direct sellers. 
C)  Hochfelder and subsequent court decisions have increased the liability of auditors under Rule 10b-5. 
D)  According to most recent court decisions, poor judgment is proof of fraud.

Question 7

One significant result of the Escott et al. v. BarChris Construction Corporation case was

Accepted Answer

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

Question 8

The 1136 Tenants case was a criminal case concerning a CPA's failure to uncover fraud during a financial statement audit.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 11

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 12

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 13

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 14

Which of the auditor's defenses against client suits 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 15

The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called

Accepted Answer

A)  separate and proportionate liability. 
B)  joint and several liability. 
C)  shared liability. 
D)  unitary liability. 
A)  separate and proportionate liability. 
B)  joint and several liability. 
C)  shared liability. 
D)  unitary liability.

Question 16

The same three defenses available to auditors in common lawsuits by third parties-nonnegligent performance, lack of duty, and absence of causal connection-are also available for suits under the Securities Exchange Act of 1934.

Accepted Answer

A) True 
 B)False

Question 17

Under the Securities Exchange Act of 1934, most of the litigation against the auditor has been generated because of the auditor's involvement with the

Accepted Answer

A)  8-K form. 
B)  10-K form. 
C)  10-Q form. 
D)  S-1 form. 
A)  8-K form. 
B)  10-K form. 
C)  10-Q form. 
D)  S-1 form.

Question 18

A common way for a CPA firm to demonstrate a lack of duty to perform is by use of a(n)

Accepted Answer

A)  expert witness' testimony. 
B)  engagement letter. 
C)  management representation letter. 
D)  confirmation letter. 
A)  expert witness' testimony. 
B)  engagement letter. 
C)  management representation letter. 
D)  confirmation letter.

Question 19

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, the auditor's ________ would be required to be shown to the court.

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 20

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.

Exam 5: Legal Liability

One of the changes in auditing procedures which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using

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

Discuss each of the four defenses a CPA firm can normally use when facing legal claims by clients.

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

Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units.

Which of the following is an accurate statement regarding Rule 10b-5 of the Securities Exchange Act of 1934?

One significant result of the Escott et al. v. BarChris Construction Corporation case was

The 1136 Tenants case was a criminal case concerning a CPA's failure to uncover fraud during a financial statement audit.

A major purpose of federal securities regulations is to

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.

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

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

Which of the auditor's defenses against client suits contends no implied or expressed contract?

The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called

The same three defenses available to auditors in common lawsuits by third parties-nonnegligent performance, lack of duty, and absence of causal connection-are also available for suits under the Securities Exchange Act of 1934.

Under the Securities Exchange Act of 1934, most of the litigation against the auditor has been generated because of the auditor's involvement with the

A common way for a CPA firm to demonstrate a lack of duty to perform is by use of a(n)

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, the auditor's ________ would be required to be shown to the court.

Constructive fraud

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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