Question 1

Audit risk is the risk there will be an audit failure for a given audit engagement.

Accepted Answer

A) True 
 B)False

Question 2

The only parties who can recover from auditors under the Securities Act of 1933 are original purchasers of securities.

Accepted Answer

A) True 
 B)False

Question 3

Under the Securities Exchange Act of 1934,which type of organization is required to submit audited financial statements to the SEC?

Accepted Answer

A)  Every company with securities traded on national and over-the-counter exchanges 
B)  Every corporation 
C)  Every company issuing new securities 
D)  Every corporation which is chartered by a state government 
A)  Every company with securities traded on national and over-the-counter exchanges 
B)  Every corporation 
C)  Every company issuing new securities 
D)  Every corporation which is chartered by a state government

Question 4

Privity of contract exists between:

Accepted Answer

A)  auditor and the federal government. 
B)  auditor and third parties. 
C)  auditor and client. 
D)  auditor and client attorney. 
A)  auditor and the federal government. 
B)  auditor and third parties. 
C)  auditor and client. 
D)  auditor and client attorney.

Question 5

Matthews & Co.,CPAs,issued an unqualified opinion on Dodgers Corporation.Millennium Bank,which relied on the audited financial statements,granted a loan of $200,00,000 to Dodgers Corporation.Dodgers subsequently defaulted on the loan.To succeed in an action against Matthews & Co.,Millennium Bank must prove that the bank was:

Accepted Answer

A)  in privity of contract with Dodgers. 
B)  in privity of contract with Millennium. 
C)  free from contributory negligence. 
D)  justified in relying on the financial statements in granting the loan. 
A)  in privity of contract with Dodgers. 
B)  in privity of contract with Millennium. 
C)  free from contributory negligence. 
D)  justified in relying on the financial statements in granting the loan.

Question 6

A major purpose of federal securities regulations is to:

Accepted Answer

A)  provide sufficient reliable information to the investing public who purchase securities in the marketplace. 
B)  establish the qualifications for accountants who are members of the profession. 
C)  eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public. 
D)  provide a set of uniform standards and tests for accountants, attorneys, and others who practice before the Securities and Exchange Commission. 
A)  provide sufficient reliable information to the investing public who purchase securities in the marketplace. 
B)  establish the qualifications for accountants who are members of the profession. 
C)  eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public. 
D)  provide a set of uniform standards and tests for accountants, attorneys, and others who practice before the Securities and Exchange Commission.

Question 7

Define ordinary negligence,gross negligence,and constructive fraud.

Accepted Answer

Ordinary negligence is the absence of re

Question 8

Which of the following is an illustration of liability under the federal securities acts?

Accepted Answer

A)  A client sues the auditor for not discovering a theft of assets by an employee. 
B)  A bank sues the auditor for not discovering that the borrower's financial statements are misstated. 
C)  A combined group of stockholders sues the auditor for not discovering materially misstated financial statements. 
D)  The auditor sues a client for not cooperating during the engagement. 
A)  A client sues the auditor for not discovering a theft of assets by an employee. 
B)  A bank sues the auditor for not discovering that the borrower's financial statements are misstated. 
C)  A combined group of stockholders sues the auditor for not discovering materially misstated financial statements. 
D)  The auditor sues a client for not cooperating during the engagement.

Question 9

"Absence of reasonable care that can be expected of a person in a set of circumstances" defines:

Accepted Answer

A)  pecuniary negligence. 
B)  gross negligence. 
C)  extreme negligence. 
D)  ordinary negligence. 
A)  pecuniary negligence. 
B)  gross negligence. 
C)  extreme negligence. 
D)  ordinary negligence.

Question 10

Although there is confusion caused by the differing views of liability to third parties under common law,the movement is clearly away from the foreseeable user approach.

Accepted Answer

A) True 
 B)False

Question 11

Distinguish between "joint and several liability" and "separate and proportionate liability."

Accepted Answer

Under joint and several liability,the de

Question 12

Under the Securities Act of 1933,the auditor's responsibility for making sure the financial statements were fairly stated extends to:

Accepted Answer

A)  the date of the financial statements. 
B)  the date the registration statement becomes effective. 
C)  the date of the audit report. 
D)  one year beyond the date of the financial statements. 
A)  the date of the financial statements. 
B)  the date the registration statement becomes effective. 
C)  the date of the audit report. 
D)  one year beyond the date of the financial statements.

Question 13

The most significant audit issue that came as a result of the court decision in the Escott et al.v.Bar Chris Construction Corporation case in 1968 was:

Accepted Answer

A)  the court's reaffirmation that the burden of proof was on the plaintiff to prove the auditor was negligent. 
B)  the affirmation of the increased auditor's responsibility when performing an S-1 review, a review of events subsequent to the balance sheet, for registration statements. 
C)  the increased auditor responsibility when associated with unaudited financial statements. 
D)  the court's refusal to allow the percentage-of-completion method of accounting for revenues. 
A)  the court's reaffirmation that the burden of proof was on the plaintiff to prove the auditor was negligent. 
B)  the affirmation of the increased auditor's responsibility when performing an S-1 review, a review of events subsequent to the balance sheet, for registration statements. 
C)  the increased auditor responsibility when associated with unaudited financial statements. 
D)  the court's refusal to allow the percentage-of-completion method of accounting for revenues.

Question 14

Distinguish between constructive fraud and fraud.

Accepted Answer

Constructive fraud is the existence of e

Question 15

In connection with the audit of financial statements,an independent auditor could be responsible for failure to detect a material fraud if:

Accepted Answer

A)  statistical sampling techniques were not used on the audit engagement. 
B)  the auditor planned the audit in a negligent manner. 
C)  accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier. 
D)  the fraud was perpetrated by one employee who circumvented the existing internal controls. 
A)  statistical sampling techniques were not used on the audit engagement. 
B)  the auditor planned the audit in a negligent manner. 
C)  accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier. 
D)  the fraud was perpetrated by one employee who circumvented the existing internal controls.

Question 16

Tort actions against CPAs are more common than breach of contract actions because:

Accepted Answer

A)  there are more torts than contracts. 
B)  the burden of proof is on the auditor rather than on the person suing. 
C)  the person suing need prove only negligence. 
D)  the amounts recoverable are normally larger. 
A)  there are more torts than contracts. 
B)  the burden of proof is on the auditor rather than on the person suing. 
C)  the person suing need prove only negligence. 
D)  the amounts recoverable are normally larger.

Question 17

Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?

Accepted Answer

A)  Private Securities Litigation Reform Act 
B)  Public Securities Damages and Settlements Act 
C)  Racketeer Influenced and Corrupt Organization Act 
D)  U.S. Securities Claims Reform Act 
A)  Private Securities Litigation Reform Act 
B)  Public Securities Damages and Settlements Act 
C)  Racketeer Influenced and Corrupt Organization Act 
D)  U.S. Securities Claims Reform Act

Question 18

The laws that have been developed through court decisions are called:

Accepted Answer

A)  common laws. 
B)  criminal laws. 
C)  statutory laws. 
D)  civil laws. 
A)  common laws. 
B)  criminal laws. 
C)  statutory laws. 
D)  civil laws.

Question 19

Statutory laws are laws that have been developed through court decisions rather than through the U.S.Congress and other governmental units.

Accepted Answer

A) True 
 B)False

Question 20

Discuss each of the four defenses a CPA firm can normally use when facing legal claims by clients.Which of these defenses is ordinarily not available against third-party suits?

Accepted Answer

Lack of duty.The CPA firm claims that th

Exam 4: Legal Liability Considerations for Auditors

Audit risk is the risk there will be an audit failure for a given audit engagement.

The only parties who can recover from auditors under the Securities Act of 1933 are original purchasers of securities.

Under the Securities Exchange Act of 1934,which type of organization is required to submit audited financial statements to the SEC?

Privity of contract exists between:

A major purpose of federal securities regulations is to:

Define ordinary negligence,gross negligence,and constructive fraud.

Which of the following is an illustration of liability under the federal securities acts?

"Absence of reasonable care that can be expected of a person in a set of circumstances" defines:

Although there is confusion caused by the differing views of liability to third parties under common law,the movement is clearly away from the foreseeable user approach.

Distinguish between "joint and several liability" and "separate and proportionate liability."

Under the Securities Act of 1933,the auditor's responsibility for making sure the financial statements were fairly stated extends to:

The most significant audit issue that came as a result of the court decision in the Escott et al.v.Bar Chris Construction Corporation case in 1968 was:

Distinguish between constructive fraud and fraud.

In connection with the audit of financial statements,an independent auditor could be responsible for failure to detect a material fraud if:

Tort actions against CPAs are more common than breach of contract actions because:

Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?

The laws that have been developed through court decisions are called:

Statutory laws are laws that have been developed through court decisions rather than through the U.S.Congress and other governmental units.

Discuss each of the four defenses a CPA firm can normally use when facing legal claims by clients.Which of these defenses is ordinarily not available against third-party suits?

The Assurance Services Market

The Audit Standards Setting Process

Audit Reports

Ethics and the Audit Profession

Audit Responsibilities and Objectives

Nature and Type of Audit Evidence

Audit Planning

Considering Materiality and Audit Risk

Considering Internal Control

Considering the Risk of Fraud

Implications of Information Technology for the Audit Process

Developing the Overall Audit Plan and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Inventory and Warehousing Cycle

Audit of the Payroll and Personnel Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Audit Completion

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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