Question 1

When bringing suit against auditors under section 10(b)of the Securities Exchange Act of 1934,plaintiffs must allege and prove

Accepted Answer

A)  the financial statements in the offering registration filing contained a material misstatement. 
B)  auditors were aware of material misstatements in the financial statements. 
C)  auditors were guilty of ordinary negligence and failed to discover material misstatements in the financial statements. 
D)  the plaintiffs purchased the specific securities through a public offering and thus have a right to sue. 
A)  the financial statements in the offering registration filing contained a material misstatement. 
B)  auditors were aware of material misstatements in the financial statements. 
C)  auditors were guilty of ordinary negligence and failed to discover material misstatements in the financial statements. 
D)  the plaintiffs purchased the specific securities through a public offering and thus have a right to sue. B

Question 2

What are the legal liabilities of auditors under common law?

Accepted Answer

Legal liabilities of auditors may arise from lawsuits brought on the basis of the law of contracts or as tort actions for failure to exercise the appropriate level of professional care.Breach of contract is a claim that accounting or auditing services were not performed in the manner agreed.Tort actions cover complaints other than breach of contract and normally involve accusations that auditors failed to detect material misstatements.Such actions are normally initiated by users of financial statements.

Question 3

Which of the following would not need to be demonstrated by third parties bringing suit against auditors for losses sustained under the Securities Act of 1933?

Accepted Answer

A)  Auditors were aware of the materially misstated financial statements. 
B)  Third-party purchasers suffered a loss. 
C)  The client's financial statements contained a material misstatement. 
D)  Purchasers would need to demonstrate all of these. 
A)  Auditors were aware of the materially misstated financial statements. 
B)  Third-party purchasers suffered a loss. 
C)  The client's financial statements contained a material misstatement. 
D)  Purchasers would need to demonstrate all of these. A

Question 4

Elliot Corp.is interested in purchasing Roger Corp.Prior to the purchase Elliot hired Adam & Co.to audit the financial statements of Roger.During the audit,Adam & Co.failed to discover a fraud that resulted in material misstatements in Roger's financial statements.After the acquisition,the fraud was discovered and Elliot Corp.suffered substantial losses.If Elliot sues Adam & Co.,Elliot must prove that Adam & Co

Accepted Answer

A)  acted recklessly or with lack of reasonable grounds for belief. 
B)  knew of the instances of fraud. 
C)  failed to exercise the appropriate level of professional care. 
D)  demonstrated gross negligence. 
A)  acted recklessly or with lack of reasonable grounds for belief. 
B)  knew of the instances of fraud. 
C)  failed to exercise the appropriate level of professional care. 
D)  demonstrated gross negligence.

Question 5

Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?

Accepted Answer

A)  Contributory negligence on the part of the client 
B)  A disclaimer contained in the engagement letter 
C)  Lack of privity 
D)  Lack of scienter 
A)  Contributory negligence on the part of the client 
B)  A disclaimer contained in the engagement letter 
C)  Lack of privity 
D)  Lack of scienter

Question 6

At the request of James Company's management,

Accepted Answer

A)  the shareholders did not suffer a loss. 
B)  the shareholders were not primary beneficiaries of the audit engagement and they have no standing to sue. 
C)  the shareholders failed to prove lack of appropriate professional care on the part of auditors. 
D)  the shareholders did not rely properly on the financial statements. 
E) G. audited James Company's financial statements and was aware that James' management intended to deliver the financial statements to its 25 shareholders for the purpose of repurchasing their shares for $50 per share (the investors had originally purchased the shares for $5 per share). The audit was conducted in accordance with generally accepted auditing standards and the financial statements were prepared in accordance with generally accepted accounting principles. Later, the shareholders sued the auditors, claiming that if they fully realized the significance of disclosures about the market value of the assets, they could have received $75 per share from James Company. The shareholders' lawsuit will probably fail because 
A)  the shareholders did not suffer a loss. 
B)  the shareholders were not primary beneficiaries of the audit engagement and they have no standing to sue. 
C)  the shareholders failed to prove lack of appropriate professional care on the part of auditors. 
D)  the shareholders did not rely properly on the financial statements. 
E) G. audited James Company's financial statements and was aware that James' management intended to deliver the financial statements to its 25 shareholders for the purpose of repurchasing their shares for $50 per share (the investors had originally purchased the shares for $5 per share). The audit was conducted in accordance with generally accepted auditing standards and the financial statements were prepared in accordance with generally accepted accounting principles. Later, the shareholders sued the auditors, claiming that if they fully realized the significance of disclosures about the market value of the assets, they could have received $75 per share from James Company. The shareholders' lawsuit will probably fail because

Question 7

Lauren hires Humphrey,a CPA,to provide an audit of her financial statements.The engagement letter includes a statement acknowledging that audited financial statements will be provided to financial institutions for a loan,but does not name any financial institutions.Humphrey completes the audit and issues an unqualified opinion.Based on the audited financial statements,Key Largo Bank approves the loan to Lauren.Four months later,Lauren files for bankruptcy.Key Largo Bank would most likely sue Humphrey claiming

Accepted Answer

A)  it was in privity of the contract. 
B)  it was a primary beneficiary. 
C)  it was a foreseen party. 
D)  it was a foreseeable party. 
A)  it was in privity of the contract. 
B)  it was a primary beneficiary. 
C)  it was a foreseen party. 
D)  it was a foreseeable party.

Question 8

To be successful in a civil action under section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement,the plaintiff must prove

Accepted Answer

A)  Auditors' intent to deceive: Yes; Plaintiff's reliance on the registration statement: Yes 
B)  Auditors' intent to deceive: Yes; Plaintiff's reliance on the registration statement: No 
C)  Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: Yes 
D)  Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: No 
A)  Auditors' intent to deceive: Yes; Plaintiff's reliance on the registration statement: Yes 
B)  Auditors' intent to deceive: Yes; Plaintiff's reliance on the registration statement: No 
C)  Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: Yes 
D)  Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: No

Question 9

Failure to provide any level care in fulfilling a duty owed to another party,including reckless disregard for the truth,is called

Accepted Answer

A)  breach of contract. 
B)  ordinary negligence. 
C)  privity. 
D)  constructive fraud. 
A)  breach of contract. 
B)  ordinary negligence. 
C)  privity. 
D)  constructive fraud.

Question 10

Typical defenses for auditors in common law actions include all of the following,except

Accepted Answer

A)  the plaintiff was foreseen. 
B)  the plaintiff contributed to the failure to detect material misstatements. 
C)  the financial statements were not materially misstated. 
D)  the audit was conducted in accordance with generally accepted auditing standards. 
A)  the plaintiff was foreseen. 
B)  the plaintiff contributed to the failure to detect material misstatements. 
C)  the financial statements were not materially misstated. 
D)  the audit was conducted in accordance with generally accepted auditing standards.

Question 11

Which of the following parties is most likely to recover against auditors for losses resulting from acts of ordinary negligence?

Accepted Answer

A)  Third parties that auditors should have foreseen could rely on the client's financial statements 
B)  The auditors' client 
C)  Purchasers and sellers of securities under the Securities Exchange Act of 1934 
D)  Third parties whose reliance on the client's financial statements was reasonably foreseeable 
A)  Third parties that auditors should have foreseen could rely on the client's financial statements 
B)  The auditors' client 
C)  Purchasers and sellers of securities under the Securities Exchange Act of 1934 
D)  Third parties whose reliance on the client's financial statements was reasonably foreseeable

Question 12

To prevail in an action brought under common law,the plaintiff must show all of the following except

Accepted Answer

A)  he or she was damaged or suffered a loss. 
B)  the financial statements contained a material misstatement. 
C)  auditors knew the financial statements contained a material misstatement. 
D)  he or she relied on the financial statements. 
A)  he or she was damaged or suffered a loss. 
B)  the financial statements contained a material misstatement. 
C)  auditors knew the financial statements contained a material misstatement. 
D)  he or she relied on the financial statements.

Question 13

Under the liability provisions of section 11 of the Securities Act of 1933,auditors may be liable to any purchaser of securities for certifying materially misstated financial statements that are included in the registration statement.Under section 11,which of the following must be proven by a purchaser of the security?

Accepted Answer

A)  Reliance on financial statements: Yes; Fraud by auditors: Yes 
B)  Reliance on financial statements: Yes; Fraud by auditors: No 
C)  Reliance on financial statements: No; Fraud by auditors: Yes 
D)  Reliance on financial statements: No; Fraud by auditors: No 
A)  Reliance on financial statements: Yes; Fraud by auditors: Yes 
B)  Reliance on financial statements: Yes; Fraud by auditors: No 
C)  Reliance on financial statements: No; Fraud by auditors: Yes 
D)  Reliance on financial statements: No; Fraud by auditors: No

Question 14

If an audit is performed for the benefit of a specific person or organization,that person or organization is known as a(n)

Accepted Answer

A)  party to the contract. 
B)  primary beneficiary. 
C)  foreseeable third party. 
D)  prime benefactor. 
A)  party to the contract. 
B)  primary beneficiary. 
C)  foreseeable third party. 
D)  prime benefactor.

Question 15

The SEC Rule 10b-5 deals with

Accepted Answer

A)  fraud in the purchase or sale of securities. 
B)  penalties for willfully and knowingly violating the Securities Exchange Act of 1934. 
C)  the use of the "due diligence" defense to avoid liability. 
D)  integrated disclosure system for annual reports. 
A)  fraud in the purchase or sale of securities. 
B)  penalties for willfully and knowingly violating the Securities Exchange Act of 1934. 
C)  the use of the "due diligence" defense to avoid liability. 
D)  integrated disclosure system for annual reports.

Question 16

How does the Securities Act of 1933,which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement,expand auditors' liability to purchasers of securities beyond that of common law?

Accepted Answer

A)  Purchasers only have to prove loss caused by reliance on audited financial statements. 
B)  Privity with purchasers is not a necessary element of proof. 
C)  Purchasers have to prove either fraud or gross negligence as a basis for recovery. 
D)  Auditors are held to a standard of care described as professional skepticism. 
A)  Purchasers only have to prove loss caused by reliance on audited financial statements. 
B)  Privity with purchasers is not a necessary element of proof. 
C)  Purchasers have to prove either fraud or gross negligence as a basis for recovery. 
D)  Auditors are held to a standard of care described as professional skepticism.

Question 17

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

Accepted Answer

A)  if auditors can show contributory negligence on the part of the purchaser. 
B)  if auditors can demonstrate due diligence. 
C)  unless the purchaser can prove privity with auditors. 
D)  unless the purchaser can prove scienter on the part of auditors. 
A)  if auditors can show contributory negligence on the part of the purchaser. 
B)  if auditors can demonstrate due diligence. 
C)  unless the purchaser can prove privity with auditors. 
D)  unless the purchaser can prove scienter on the part of auditors.

Question 18

Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages?

Accepted Answer

A)  Gross negligence amounting to constructive fraud 
B)  Failure to investigate possible fraud when other entities in the industry have experienced frauds 
C)  Reckless disregard of evidence that the financial statements do not conform to generally accepted accounting principles 
D)  Issuing an unqualified auditors' opinion when evidence suggests that the financial statements were not prepared according to generally accepted accounting principles 
A)  Gross negligence amounting to constructive fraud 
B)  Failure to investigate possible fraud when other entities in the industry have experienced frauds 
C)  Reckless disregard of evidence that the financial statements do not conform to generally accepted accounting principles 
D)  Issuing an unqualified auditors' opinion when evidence suggests that the financial statements were not prepared according to generally accepted accounting principles

Question 19

Using the following letters,identify the case to which each statement is most closely related:

Accepted Answer

The answer of Using the following letters,identify the case to...

Question 20

A principle that may reduce or eliminates auditors' liability to clients is

Accepted Answer

A)  client's constructive negligence. 
B)  client's contributory negligence. 
C)  auditors' ordinary negligence. 
D)  auditors' gross negligence. 
A)  client's constructive negligence. 
B)  client's contributory negligence. 
C)  auditors' ordinary negligence. 
D)  auditors' gross negligence.

When bringing suit against auditors under section 10(b)of the Securities Exchange Act of 1934,plaintiffs must allege and prove

What are the legal liabilities of auditors under common law?

Which of the following would not need to be demonstrated by third parties bringing suit against auditors for losses sustained under the Securities Act of 1933?

Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?

At the request of James Company's management,

To be successful in a civil action under section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement,the plaintiff must prove

Failure to provide any level care in fulfilling a duty owed to another party,including reckless disregard for the truth,is called

Typical defenses for auditors in common law actions include all of the following,except

Which of the following parties is most likely to recover against auditors for losses resulting from acts of ordinary negligence?

To prevail in an action brought under common law,the plaintiff must show all of the following except

If an audit is performed for the benefit of a specific person or organization,that person or organization is known as a(n)

The SEC Rule 10b-5 deals with

How does the Securities Act of 1933,which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement,expand auditors' liability to purchasers of securities beyond that of common law?

Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages?

Using the following letters,identify the case to which each statement is most closely related:

A principle that may reduce or eliminates auditors' liability to clients is

Auditing and Assurance Services

Professional Standards

Engagement Planning

Management Fraud and Audit Risk

Risk Assessment: Internal Control Evaluation

Employee Fraud and the Audit of Cash

Revenue and Collection Cycle

Acquisition and Expenditure Cycle

Production Cycle

Finance and Investment Cycle

Completing the Audit

Reports on Audited Financial Statements

Other Public Accounting Services

Professional Ethics

Internal Audits governmental Audits and Fraud Examinations

Overview of Sampling

Attributes Sampling

Variables Sampling

Auditing and Information Technology

Filters

Exam 15: Legal Liability

When bringing suit against auditors under section 10(b)of the Securities Exchange Act of 1934,plaintiffs must allege and prove

What are the legal liabilities of auditors under common law?

Which of the following would not need to be demonstrated by third parties bringing suit against auditors for losses sustained under the Securities Act of 1933?

Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?

At the request of James Company's management,

To be successful in a civil action under section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement,the plaintiff must prove

Failure to provide any level care in fulfilling a duty owed to another party,including reckless disregard for the truth,is called

Typical defenses for auditors in common law actions include all of the following,except

Which of the following parties is most likely to recover against auditors for losses resulting from acts of ordinary negligence?

To prevail in an action brought under common law,the plaintiff must show all of the following except

If an audit is performed for the benefit of a specific person or organization,that person or organization is known as a(n)

The SEC Rule 10b-5 deals with

How does the Securities Act of 1933,which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement,expand auditors' liability to purchasers of securities beyond that of common law?

Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages?

Using the following letters,identify the case to which each statement is most closely related:

A principle that may reduce or eliminates auditors' liability to clients is

Auditing and Assurance Services

Professional Standards

Engagement Planning

Management Fraud and Audit Risk

Risk Assessment: Internal Control Evaluation

Employee Fraud and the Audit of Cash

Revenue and Collection Cycle

Acquisition and Expenditure Cycle

Production Cycle

Finance and Investment Cycle

Completing the Audit

Reports on Audited Financial Statements

Other Public Accounting Services

Professional Ethics

Internal Audits governmental Audits and Fraud Examinations

Overview of Sampling

Attributes Sampling

Variables Sampling

Auditing and Information Technology

Filters