Question 1

To recover against an auditor in a negligence case, the client must prove that the client sustained an actual loss or damage.

Accepted Answer

A) True 
 B)False

Question 2

Hark, CPA, failed to follow all generally accepted auditing standards in auditing Long Corp.'s financial statements, but the failure would not amount to gross negligence. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the Ultramares doctrine, if Third sues Hark, Hark will:

Accepted Answer

A) win because there was no privity of contract between Hark and Third. 
B) lose because Hark knew that banks would be relying on the financial statements. 
C) win because there was contributory negligence on the part of Third in granting the loan. 
D) lose because Hark was negligent in performing the audit. 
A) win because there was no privity of contract between Hark and Third. 
B) lose because Hark knew that banks would be relying on the financial statements. 
C) win because there was contributory negligence on the part of Third in granting the loan. 
D) lose because Hark was negligent in performing the audit.

Question 3

What is the primary reason that Congress passed the Securities Litigation Uniform Standards Act of 1998?

Accepted Answer

A) To overturn the Private Securities Litigation Reform Act of 1995. 
B) As a result of concerns that plaintiff attorneys could get around the Private Securities Litigation Reform Act of 1995 by filing class action lawsuits involving nationally traded securities in state courts. 
C) To provide for joint and several liability rather than proportionate liability. 
D) To ensure that all publicly-held companies receive similar audits. 
A) To overturn the Private Securities Litigation Reform Act of 1995. 
B) As a result of concerns that plaintiff attorneys could get around the Private Securities Litigation Reform Act of 1995 by filing class action lawsuits involving nationally traded securities in state courts. 
C) To provide for joint and several liability rather than proportionate liability. 
D) To ensure that all publicly-held companies receive similar audits.

Question 4

A CPA's duty of due care to a client most likely will be breached when a CPA:

Accepted Answer

A) gives a client a written audit report. 
B) gives a client incorrect advice based on an honest error of judgment. 
C) fails to give tax advice that saves the client money. 
D) fails to follow generally accepted auditing standards. 
A) gives a client a written audit report. 
B) gives a client incorrect advice based on an honest error of judgment. 
C) fails to give tax advice that saves the client money. 
D) fails to follow generally accepted auditing standards.

Question 5

Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, a material misstatement in the financial statements went undetected. Ocean was unaware of this fact. The financial statements and Ocean's unqualified opinion were included in a registration statement and prospectus for an initial public offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the prospectus prior to the purchase but did not read it. The shares declined in value as a result of the misstatements in Drain's financial statements becoming known. Under which of the following acts is Sharp most likely to prevail in a lawsuit against Ocean?

Accepted Answer

A) The Securities Exchange Act of 1934, the Securities Act of 1933, and the Sarbanes-Oxley Act of 2002 provide equal likelihoods of prevailing. 
B) The Securities Exchange Act of 1934. 
C) The Securities Act of 1933. 
D) The Sarbanes-Oxley Act of 2002. 
A) The Securities Exchange Act of 1934, the Securities Act of 1933, and the Sarbanes-Oxley Act of 2002 provide equal likelihoods of prevailing. 
B) The Securities Exchange Act of 1934. 
C) The Securities Act of 1933. 
D) The Sarbanes-Oxley Act of 2002.

Question 6

In a common law action against an accountant in a state following the Ultramares doctrine, lack of privity is a viable defense if the plaintiff:

Accepted Answer

A) can prove the presence of gross negligence which amounts to a reckless disregard for the truth. 
B) bases the action upon fraud. 
C) is the client's creditor who sues the accountant for negligence. 
D) is the accountant's client. 
A) can prove the presence of gross negligence which amounts to a reckless disregard for the truth. 
B) bases the action upon fraud. 
C) is the client's creditor who sues the accountant for negligence. 
D) is the accountant's client.

Question 7

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove:

Accepted Answer

A) the plaintiff's reliance on the registration statement and the defendant's intent to deceive. 
B) neither the plaintiff's reliance on the registration statement nor the defendant's intent to deceive. 
C) the plaintiff's reliance on the registration statement but not the defendant's intent to deceive. 
D) the defendant's intent to deceive but not the plaintiff's reliance on the registration statement. 
A) the plaintiff's reliance on the registration statement and the defendant's intent to deceive. 
B) neither the plaintiff's reliance on the registration statement nor the defendant's intent to deceive. 
C) the plaintiff's reliance on the registration statement but not the defendant's intent to deceive. 
D) the defendant's intent to deceive but not the plaintiff's reliance on the registration statement.

Question 8

The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by:

Accepted Answer

A) expanding laws against fraud and obstruction of justice. 
B) increasing criminal penalties for fraud and its cover-up. 
C) strengthening sentencing guidelines applicable to large-scale frauds. 
D) All of these are true. 
A) expanding laws against fraud and obstruction of justice. 
B) increasing criminal penalties for fraud and its cover-up. 
C) strengthening sentencing guidelines applicable to large-scale frauds. 
D) All of these are true.

Question 9

An audit client loses a lawsuit and the judgment is for an amount in excess of the contingent liability the client had recorded in the audited financial statements. The auditor, using the typical degree of due care as other members of the profession, determined that the amount of contingent liability recorded by the client in the financial statements for the pending lawsuit was reasonable, given the facts at the time of the audit. This judgment by the auditor is likely to result in:

Accepted Answer

A) sanctions by the PCAOB levied against the individual auditor as well as the accounting firm. 
B) a successful lawsuit claiming auditor negligence. 
C) a successful lawsuit claiming breach of contract. 
D) no legal action whatsoever since due care was exercised. 
A) sanctions by the PCAOB levied against the individual auditor as well as the accounting firm. 
B) a successful lawsuit claiming auditor negligence. 
C) a successful lawsuit claiming breach of contract. 
D) no legal action whatsoever since due care was exercised.

Question 10

One of the greatest sources of liability for auditors under the 1934 Act is Section 10(b)and the related Rule 10b-5, which states that it is unlawful for any person to defraud, make any untrue statement of a material fact, or engage in any act in connection with the purchase or sale of a security. Once a plaintiff has established that he or she can sue under Rule 10b-5, there are four elements that must be proven. List the four elements.

Accepted Answer

1. A material, factual misrepresentation

Question 11

Gold, CPA, rendered an unqualified opinion on the financial statements of Eastern Power Company. Egan purchased Eastern bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC included the audited financial statements. Gold is being sued by Egan under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements. To prevail, Egan must prove:

Accepted Answer

A) neither scienter nor reliance. 
B) reliance but not scienter. 
C) scienter but not reliance. 
D) both scienter and reliance. 
A) neither scienter nor reliance. 
B) reliance but not scienter. 
C) scienter but not reliance. 
D) both scienter and reliance.

Question 12

Ritz Corporation wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale. Based on the audited financial statements and Fein's unqualified opinion, Ritz acquired Stale. Within 6 months, it was discovered that the inventory of Stale had been overstated by $500,000. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality, but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that the inventory was overstated. Which of the following two causes of action would Ritz need to prove to prevail in a lawsuit?

Accepted Answer

A) Negligence and breach of contract. 
B) Negligence and gross negligence. 
C) Negligence and fraud. 
D) Gross negligence and breach of contract. 
A) Negligence and breach of contract. 
B) Negligence and gross negligence. 
C) Negligence and fraud. 
D) Gross negligence and breach of contract.

Question 13

Section 11 under the Securities Act of 1933 treats claims against auditors more favorably than common law. What two things does a plaintiff need to prove to have a case against the auditor of a company in which she purchased new investments? What does the auditor have to do to have the case dismissed?

Accepted Answer

The plaintiff need only prove that (1)a

Question 14

Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?

Accepted Answer

A) The auditor exercised due diligence in following PCAOB auditing standards and generally accepted fraud detection standards. 
B) The auditor exercised due diligence in following PCAOB auditing standards but not generally accepted fraud detection standards. 
C) The auditor exercised due diligence in following PCAOB fraud detection standards but not generally accepted auditing standards. 
D) The auditor exercised due diligence in following neither PCAOB auditing standards nor generally accepted fraud detection standards. 
A) The auditor exercised due diligence in following PCAOB auditing standards and generally accepted fraud detection standards. 
B) The auditor exercised due diligence in following PCAOB auditing standards but not generally accepted fraud detection standards. 
C) The auditor exercised due diligence in following PCAOB fraud detection standards but not generally accepted auditing standards. 
D) The auditor exercised due diligence in following neither PCAOB auditing standards nor generally accepted fraud detection standards.

Question 15

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common-law negligence, Larson's best defense would be that the:

Accepted Answer

A) audit was conducted in accordance with generally accepted auditing standards. 
B) client was aware of the misstatements. 
C) purchaser was not in privity of contract with Larson. 
D) identity of the purchaser was not known to Larson at the time of the audit. 
A) audit was conducted in accordance with generally accepted auditing standards. 
B) client was aware of the misstatements. 
C) purchaser was not in privity of contract with Larson. 
D) identity of the purchaser was not known to Larson at the time of the audit.

Question 16

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

Accepted Answer

A) Only parties in privity and not those reasonably foreseeable third parties. 
B) Both parties in privity and reasonably foreseeable third parties. 
C) Only reasonably foreseeable third parties and not those parties in privity. 
D) Neither reasonably foreseeable third parties nor parties in privity. 
A) Only parties in privity and not those reasonably foreseeable third parties. 
B) Both parties in privity and reasonably foreseeable third parties. 
C) Only reasonably foreseeable third parties and not those parties in privity. 
D) Neither reasonably foreseeable third parties nor parties in privity.

Question 17

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In suit by a purchaser against Larson for common-law fraud, Larson's best defense would be that:

Accepted Answer

A) Larson did not have actual or constructive knowledge of the misstatements and the auditor followed PCAOB Auditing Standards in the audit. 
B) Larson's client knew or should have known of the misstatements. 
C) Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit. 
D) Larson was not in privity of contract with its client. 
A) Larson did not have actual or constructive knowledge of the misstatements and the auditor followed PCAOB Auditing Standards in the audit. 
B) Larson's client knew or should have known of the misstatements. 
C) Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit. 
D) Larson was not in privity of contract with its client.

Question 18

In general, the third-party (primary)beneficiary rule as applied to a CPA's legal liability in conducting an audit is relevant to which of the following causes of action against a CPA?

Accepted Answer

A) Fraud and constructive fraud, but not negligence. 
B) Fraud, but not constructive fraud or negligence. 
C) Constructive fraud and negligence, but not fraud. 
D) Negligence, but not fraud or constructive fraud. 
A) Fraud and constructive fraud, but not negligence. 
B) Fraud, but not constructive fraud or negligence. 
C) Constructive fraud and negligence, but not fraud. 
D) Negligence, but not fraud or constructive fraud.

Question 19

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under Section 11 of the Securities Act of 1933?

Accepted Answer

A) The purchaser must prove that Larson was negligent in conducting the audit. 
B) The purchaser must prove that Larson knew of the material misstatements. 
C) Larson will not be liable if it had reasonable grounds, based on work performed, to believe the financial statements were accurate. 
D) Larson will be liable unless the purchaser did not rely on the financial statements. 
A) The purchaser must prove that Larson was negligent in conducting the audit. 
B) The purchaser must prove that Larson knew of the material misstatements. 
C) Larson will not be liable if it had reasonable grounds, based on work performed, to believe the financial statements were accurate. 
D) Larson will be liable unless the purchaser did not rely on the financial statements.

Question 20

When performing an audit, a CPA:

Accepted Answer

A) must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. 
B) must strictly adhere to generally accepted accounting principles. 
C) is strictly liable for failing to discover client fraud. 
D) is not liable under any legal standard unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards. 
A) must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. 
B) must strictly adhere to generally accepted accounting principles. 
C) is strictly liable for failing to discover client fraud. 
D) is not liable under any legal standard unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards.

To recover against an auditor in a negligence case, the client must prove that the client sustained an actual loss or damage.

What is the primary reason that Congress passed the Securities Litigation Uniform Standards Act of 1998?

A CPA's duty of due care to a client most likely will be breached when a CPA:

In a common law action against an accountant in a state following the Ultramares doctrine, lack of privity is a viable defense if the plaintiff:

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove:

The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by:

Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?

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

In general, the third-party (primary)beneficiary rule as applied to a CPA's legal liability in conducting an audit is relevant to which of the following causes of action against a CPA?

When performing an audit, a CPA:

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Assurance, Attestation, and Internal Auditing Services

Filters

Exam 20: Legal Liability

To recover against an auditor in a negligence case, the client must prove that the client sustained an actual loss or damage.

What is the primary reason that Congress passed the Securities Litigation Uniform Standards Act of 1998?

A CPA's duty of due care to a client most likely will be breached when a CPA:

In a common law action against an accountant in a state following the Ultramares doctrine, lack of privity is a viable defense if the plaintiff:

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove:

The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by:

Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?

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

In general, the third-party (primary)beneficiary rule as applied to a CPA's legal liability in conducting an audit is relevant to which of the following causes of action against a CPA?

When performing an audit, a CPA:

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Assurance, Attestation, and Internal Auditing Services

Filters