Exam 15: Legal Liability

Lancaster & Co.CPAs is auditing the financial statements of Cooper Corporation.During the course of the audit,Cooper Corporation sent the following memo to the engagement partner: We have requested $1 million worth of products from Ladd Corporation with credit terms of net 30 days.Ladd has requested audited financial statements for its credit decision.We notified Ladd that our annual audit was in process and we would provide the audited financial statements to them as soon as they were completed. Which of the following statements is true with regards to this memo?

Sun Corp.approved a merger plan with Cord Corp.One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co.,CPAs.Sun had engaged Frank to audit Cord's financial statements.While performing the audit,Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses.For Frank to be liable under common law liability,Sun at a minimum must prove that Frank

Paula performed the audit of the financial statements of Abdul Company (a nonpublic entity currently not subject to filing requirements under the Securities Act of 1933 or Securities Exchange Act of 1934).Abdul Company is currently considering several alternatives for raising capital,including seeking financing from area banks or an initial public offering of its securities.Which of the following parties would have the lowest likelihood of successfully bringing suit for ordinary negligence against Paula?

Briefly explain the concept of proportionate liability.Why is the adoption of proportionate liability important to the accounting profession?

According to Sarbanes-Oxley,accountants performing an audit or review must maintain all engagement documentation for a period of

An audit failure occurs when

Under the anti-fraud provisions of section 10(b)of the Securities Exchange Act of 1934,auditors may be liable if they acted

Which of the following statements about the Securities Act of 1933 is not true?

Foreseeable third parties are best described as

While conducting an audit of a public entity,Wallace failed to identify material misstatements in its client's financial statements.Investors then sued Wallace in connection with this audit.Which of the following would not need to be demonstrated in order for the shareholders to successfully bring suit against Wallace?

Which of the following statements concerning the Ultramares Corp.v.Touche case is not true?

Kerry CPA is the auditor for Sammy Corp.During the audit,Kerry discovers a material misstatement in Sammy's financial statements.Sammy's management tells Kerry that if the misstatement is corrected or if Kerry issues an opinion that indicates there is a material misstatement,Sammy Corp.will likely have to declare bankruptcy and thousands of employees will lose their jobs.Which of the following statements is true if the misstatement is not corrected and Kerry issues an unqualified opinion on Sammy's financial statements?

Which of the following factors would not influence third parties' abilities to bring suit against auditors for ordinary negligence under common law?

Auditors should not be liable to any party if they perform services that met the standards of

The Securities Act of 1933

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

Lauren hires Humphrey,a CPA,to audit her financial statements.The engagement letter includes a statement acknowledging that audited financial statements are required to be filed with a regulatory body by October 1.Humphrey does not complete the audit until October 5.Lauren is late filing the financial statements and is fined $100,000 by the regulatory body.Lauren would most likely sue Humphrey claiming

Which of the following is not a valid defense for auditors' liability to third parties for ordinary negligence under common law?

Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act?

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?