Exam 4: Legal Liability Considerations for Auditors

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 partnership of Booth & Haynes,CPAs,has been engaged to examine the financial statements of Paul,Inc.,in connection with the registration of Paul's securities with the Securities and Exchange Commission.Under these circumstances,which of the following statements is true?

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

To succeed in an action against the auditor,the client must be able to show that:

The restatement of torts approach to the concept of foreseen users states that any users that the auditor should have reasonably been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.

Under common law,a foreseen user would be treated the same as:

Discuss at least 3 steps the AICPA and the accounting profession as a whole can and are taking to reduce the practitioner's exposure to lawsuits.

According to the principle established by the Restatement of Torts case,foreseen users must be members of:

Distinguish between what is meant by business failure and audit failure.

In a leading securities law and CPA liabilities case,the U.S.Supreme Court ruled in 1976 in Hochfelder v.Ernst & Ernst that before CPAs could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934,what would be required to be shown to the court was the auditor's:

The basic legal concept which was affirmed in the 1985 New York case,Credit Alliance,was that:

The preferred defense in third party suits is:

In an action against a CPA in a jurisdiction that follows the Ultramares doctrine,lack of privity is a viable defense provided the plaintiff:

A(n)________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards.

The increased litigation under the federal securities laws has resulted from:

Match seven of the legal terms (a-j)with the definitions provided below (1-7): a.Common law b.Constructive fraud c.Breach of contract d.Joint and several liability e.Ordinary negligence f.Third-party beneficiary g.Gross negligence h.Statutory law i.Fraud j.Separate and proportionate liability ________ 1.Laws that have been passed by the U.S.Congress and other governmental units. ________ 2.Absence of reasonable care that can be expected of a person in a set of circumstances. ________ 3.Lack of even slight care,tantamount to reckless behavior that can be expected of a person. ________ 4.The assessment against a defendant of that portion of the damage caused by the defendant's negligence. ________ 5.Failure of one or both parties in a contract to fulfill the requirements of the contract. ________ 6.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. ________ 7.Existence of extreme or unusual negligence even though there was no intent to deceive or do harm; also termed recklessness.

Under common law,an individual or company that (1)does not have a contract with an auditor,(2)is known by the auditor in advance of the audit,and (3)will use the auditor's report to make decisions about the client company has:

Laws that have been passed by the U.S.Congress and other governmental units are:

The Sarbanes-Oxley Act of 2002 makes it a felony to destroy or create documents to impede or obstruct a federal investigation.Those provisions were adopted following which of the following legal cases?

An individual who is not party to the contract between a CPA and the client,but who is known by both and is intended to receive certain benefits from the contract is known as: