Exam 20: Legal Liability

Briefly describe the Sarbanes-Oxley Act of 2002. Be sure to mention (1)who passed the Act, (2)its primary objectives, (3)major aspects of the Act, (4)the parties that it affects, and (5)its relationship to the SEC rules.

Auditors can be held liable under two classes of law when sued by clients, investors, creditors, or the government. Identify and briefly explain both classes of law.

Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under Section 11, a CPA usually will not be liable to the purchaser:

To prevail in a suit alleging negligence, a third party must prove that the auditor had a duty to the auditor's client to exercise due care.

When performing an audit, a CPA will most likely be considered negligent when the CPA fails to:

Privity of contract is the most restrictive view for plaintiffs under common law.

An auditor, using the same degree of due care as other members of the profession, fails to identify an inadequate allowance for bad debts. This occurrence is an example of:

Under the "Ultramares" doctrine, to which of the following parties will an accountant be liable for negligence?

Common law requires the auditor perform professional services with due care.

West & Company, CPAs, was engaged by Sand Corporation to audit its financial statements. West issued an unqualified opinion on Sand's financial statements. Sand has been accused of making negligent misrepresentations in the financial statements that Reed relied upon when purchasing Sand's stock. West was not aware of the misrepresentations and was not negligent in performing the audit. If Reed sues West for damages based on Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934, West will:

Rule 10b-5 under Section 10(b)of the Securities Exchange Act of 1934 imposes liability on an accountant for violation of certain duties. Which of the following is an investor not required to prove to recover from a CPA?

The Sarbanes-Oxley Act of 2002 is considered the most sweeping securities law since the 1933 and 1934 Acts. Which item in the list below was not part of the Sarbanes-Oxley Act of 2002?

A CPA who fraudulently performs an audit of a corporation's financial statements will:

An auditor can be guilty under federal statutory law if s/he was reckless in performance of her/his professional duties.

This act increased legal protections available to whistleblowers.

Ford & Co., CPAs, issued an unqualified opinion on Owens Corp.'s financial statements. Relying on these financial statements, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the financial statements or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common law fraud action against Ford, Century must prove, in addition to other elements, that:

Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA?

Which of the following is the best statement of the duty owed by an accountant in his or her professional work?

A tort is a breach of contract for which civil action may be taken.

An auditor can be sued by a third party under statutory law for willful violation of federal statutes.