Question 1

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 2

A group typically included as "third parties" in common law is

Accepted Answer

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

Question 3

An auditor working for a CPA firm was found to be guilty of extreme or unusual negligence, though it was not proven that the auditor intended to deceive or do harm in the performance of an audit. Which of the terms related to negligence and fraud is this situation describing?

Accepted Answer

A)  fraud 
B)  ordinary negligence 
C)  constructive fraud 
D)  gross negligence 
A)  fraud 
B)  ordinary negligence 
C)  constructive fraud 
D)  gross negligence

Question 4

An important concept in contract law for accountants to understand is the "third-party beneficiary doctrine." Explain and give an example.

Accepted Answer

A third party who does not have privity

Question 5

Which of the following is an accurate statement regarding recent actions brought against accountants by clients and third parties?

Accepted Answer

A)  Litigants will first seek state remedies because of the availability of class-action litigation. 
B)  Gross negligence by the auditor must be proven under the Securities Acts of 1933 and 1934. 
C)  The greatest growth in CPA liability litigation has been under the federal securities laws. 
D)  The amount of damages that plaintiffs can receive is greater under common law than under the federal securities laws. 
A)  Litigants will first seek state remedies because of the availability of class-action litigation. 
B)  Gross negligence by the auditor must be proven under the Securities Acts of 1933 and 1934. 
C)  The greatest growth in CPA liability litigation has been under the federal securities laws. 
D)  The amount of damages that plaintiffs can receive is greater under common law than under the federal securities laws.

Question 6

Under the Securities Act of 1933, the auditor's responsibility for making sure the financial statements were fairly stated extends to

Accepted Answer

A)  the date of the financial statements. 
B)  the date the registration statement becomes effective. 
C)  the date of the audit report. 
D)  one year beyond the date of the financial statements. 
A)  the date of the financial statements. 
B)  the date the registration statement becomes effective. 
C)  the date of the audit report. 
D)  one year beyond the date of the financial statements.

Question 7

Constructive fraud is also termed recklessness as it pertains to CPAs' potential liability.

Accepted Answer

A) True 
 B)False

Question 8

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 9

While the Foreign Corrupt Practices Act of 1977 remains in effect, its internal control provisions have been largely superseded by which of the following?

Accepted Answer

A)  Sarbanes-Oxley Act of 2002 
B)  Racketeer Influenced and Corrupt Organization Act 
C)  Federal False Statements Statute 
D)  Federal Mail Fraud Statute 
A)  Sarbanes-Oxley Act of 2002 
B)  Racketeer Influenced and Corrupt Organization Act 
C)  Federal False Statements Statute 
D)  Federal Mail Fraud Statute

Question 10

The legal issue with regards to the Big Four CPA firms being required to comply with the Fair Labor Standards Act with regards to overtime pay policies and procedures is settled.

Accepted Answer

A) True 
 B)False

Question 11

A CPA is subject to criminal liability if the CPA

Accepted Answer

A)  refuses to turn over requested audit documentation to a client. 
B)  performs an audit in a negligent manner. 
C)  is knowingly involved with false financial statements. 
D)  willfully breaches a contract with a client. 
A)  refuses to turn over requested audit documentation to a client. 
B)  performs an audit in a negligent manner. 
C)  is knowingly involved with false financial statements. 
D)  willfully breaches a contract with a client.

Question 12

Discuss some of the steps practicing auditors can take to minimize their legal liability.

Accepted Answer

There are many steps individual practiti

Question 13

There are four major sources of an auditor's legal liability. One source is liability to the audit client. List the other three sources.

Accepted Answer

The other three sources of aud

Question 14

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 15

In the Rusch Factors v. Levin (1968) case, which of the following approaches did the court take to assign third-party liability under common law?

Accepted Answer

A)  primary beneficiary 
B)  foreseeable user 
C)  foreseen user 
D)  identified user 
A)  primary beneficiary 
B)  foreseeable user 
C)  foreseen user 
D)  identified user

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

Which of the following statements is true?

Accepted Answer

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

Question 18

Audit risk is avoidable, as long as the auditor performs the audit in accordance with auditing standards.

Accepted Answer

A) True 
 B)False

Question 19

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

Question 20

The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called

Accepted Answer

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

Exam 5: Legal Liability

The major conclusion of the 1931 Ultramares case was that

A group typically included as "third parties" in common law is

An auditor working for a CPA firm was found to be guilty of extreme or unusual negligence, though it was not proven that the auditor intended to deceive or do harm in the performance of an audit. Which of the terms related to negligence and fraud is this situation describing?

An important concept in contract law for accountants to understand is the "third-party beneficiary doctrine." Explain and give an example.

Which of the following is an accurate statement regarding recent actions brought against accountants by clients and third parties?

Under the Securities Act of 1933, the auditor's responsibility for making sure the financial statements were fairly stated extends to

Constructive fraud is also termed recklessness as it pertains to CPAs' potential liability.

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.

While the Foreign Corrupt Practices Act of 1977 remains in effect, its internal control provisions have been largely superseded by which of the following?

The legal issue with regards to the Big Four CPA firms being required to comply with the Fair Labor Standards Act with regards to overtime pay policies and procedures is settled.

A CPA is subject to criminal liability if the CPA

Discuss some of the steps practicing auditors can take to minimize their legal liability.

There are four major sources of an auditor's legal liability. One source is liability to the audit client. List the other three sources.

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.

In the Rusch Factors v. Levin (1968) case, which of the following approaches did the court take to assign third-party liability under common law?

An example of a breach of contract would likely include

Which of the following statements is true?

Audit risk is avoidable, as long as the auditor performs the audit in accordance with auditing standards.

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 assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called

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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