Question 1

In the performance of an audit,a CPA:

Accepted Answer

A)  is legally liable for detecting an immaterial client fraud. 
B)  must strictly follow GAAP for privately held clients. 
C)  must exercise constructive professional care in the performance of their audit responsibilities. 
D)  must exercise due professional care in the performance of their audit responsibilities. 
A)  is legally liable for detecting an immaterial client fraud. 
B)  must strictly follow GAAP for privately held clients. 
C)  must exercise constructive professional care in the performance of their audit responsibilities. 
D)  must exercise due professional care in the performance of their audit responsibilities.

Question 2

Under the federal securities acts,one significant result occurring directly due to the Escott et al.v.Bar Chris Construction Corporation case was that SAS was changed to require:

Accepted Answer

A)  greater emphasis on subsequent events procedures. 
B)  new standards for unaudited statements. 
C)  a broader definition of third party beneficiaries. 
D)  more companies to file annual reports with the SEC. 
A)  greater emphasis on subsequent events procedures. 
B)  new standards for unaudited statements. 
C)  a broader definition of third party beneficiaries. 
D)  more companies to file annual reports with the SEC.

Question 3

A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients.Which one of the following is generally not a defense?

Accepted Answer

A)  Lack of duty 
B)  Nonnegligent performance 
C)  Contributory negligence 
D)  Foreseeable users 
A)  Lack of duty 
B)  Nonnegligent performance 
C)  Contributory negligence 
D)  Foreseeable users

Question 4

As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp.,Harrison,CPA,did not detect the embezzlement of a material amount of funds by the company's controller.As a matter of common law,to what extent would Harrison be liable to the Lamp Corp.for losses attributable to the theft?

Accepted Answer

A)  He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees. 
B)  He would have no liability because privity of contract is lacking. 
C)  He would be liable for losses attributable to his negligence. 
D)  He would be liable only if it could be proven that he was grossly negligent. 
A)  He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees. 
B)  He would have no liability because privity of contract is lacking. 
C)  He would be liable for losses attributable to his negligence. 
D)  He would be liable only if it could be proven that he was grossly negligent.

Question 5

If the CPA negligently failed to properly prepare and file a client's tax return,the CPA may be liable for:

Accepted Answer

A)  the penalties the client owes the IRS. 
B)  the penalties and interest the client owes. 
C)  the penalties and interest the client owes, plus the tax preparation fee the CPA charged. 
D)  the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid. 
A)  the penalties the client owes the IRS. 
B)  the penalties and interest the client owes. 
C)  the penalties and interest the client owes, plus the tax preparation fee the CPA charged. 
D)  the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid.

Question 6

Many litigation experts believe that a well written engagement letter significantly reduces the likelihood of adverse legal actions.

Accepted Answer

A) True 
 B)False

Question 7

The doctrine of joint and several liability is one factor that has contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

Accepted Answer

A) True 
 B)False

Question 8

Gross negligence is the existence of extreme or unusual negligence with the intent to deceive.

Accepted Answer

A) True 
 B)False

Question 9

A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.This is known as the concept of:

Accepted Answer

A)  foreseen users. 
B)  foreseeable users. 
C)  expected users. 
D)  four-party contracts. 
A)  foreseen users. 
B)  foreseeable users. 
C)  expected users. 
D)  four-party contracts.

Question 10

The principal issue in cases involving alleged negligence is usually:

Accepted Answer

A)  if an an engagement letter was issued. 
B)  the level of care required. 
C)  if fraud was committed by upper-level management. 
D)  whether the auditor is liable under civil or criminal laws. 
A)  if an an engagement letter was issued. 
B)  the level of care required. 
C)  if fraud was committed by upper-level management. 
D)  whether the auditor is liable under civil or criminal laws.

Question 11

Gregory & Hedrick,a medium-sized CPA firm,employed Elise as a staff accountant.Elise was negligent while auditing several of the firm's clients.Under these circumstances,which of the following statements is true?

Accepted Answer

A)  Elise would have no personal liability for negligence. 
B)  Gregory & Hedrick is not liable for Elise's negligence because CPAs are generally considered to be independent contractors. 
C)  Gregory & Hedrick would not be liable for Elise's negligence if Elise disobeyed specific instructions in the performance of the audits. 
D)  Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work. 
A)  Elise would have no personal liability for negligence. 
B)  Gregory & Hedrick is not liable for Elise's negligence because CPAs are generally considered to be independent contractors. 
C)  Gregory & Hedrick would not be liable for Elise's negligence if Elise disobeyed specific instructions in the performance of the audits. 
D)  Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work.

Question 12

Companies with securities traded on national and over-the-counter exchanges are required to submit audited financial statements once every three years to the Securities and Exchange Commission.

Accepted Answer

A) True 
 B)False

Question 13

Under the Securities Exchange Act of 1934,most of the litigation against the auditor has been generated because of the auditor's involvement with the:

Accepted Answer

A)  8-K form. 
B)  10-K form. 
C)  10-Q form. 
D)  S-1 form. 
A)  8-K form. 
B)  10-K form. 
C)  10-Q form. 
D)  S-1 form.

Question 14

The Foreign Corrupt Practices Act (FCPA)of 1977:

Accepted Answer

A)  requires auditors to review and evaluate systems of internal control as a part of an audit. 
B)  requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control. 
C)  requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA. 
D)  requires auditors to file a report with the SEC if client's internal control system is inadequate. 
A)  requires auditors to review and evaluate systems of internal control as a part of an audit. 
B)  requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control. 
C)  requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA. 
D)  requires auditors to file a report with the SEC if client's internal control system is inadequate.

Question 15

Discuss the sanctions the Securities and Exchange Commission can impose on auditors.

Accepted Answer

The SEC has the power in certain circums

Question 16

A CPA is subject to criminal liability if the CPA:

Accepted Answer

A)  refuses to turn over requested audit documentation to a client. 
B)  performs an audit in a negligent manner. 
C)  is knowingly involved with false financial statements. 
D)  willfully breaches a contract with a client. 
A)  refuses to turn over requested audit documentation to a client. 
B)  performs an audit in a negligent manner. 
C)  is knowingly involved with false financial statements. 
D)  willfully breaches a contract with a client.

Question 17

Discuss three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

Accepted Answer

Major factors include:
•The growing awar

Question 18

A common way for a CPA firm to demonstrate a lack of duty to perform is by use of a(n):

Accepted Answer

A)  expert witness' testimony. 
B)  engagement letter. 
C)  management representation letter. 
D)  confirmation letter. 
A)  expert witness' testimony. 
B)  engagement letter. 
C)  management representation letter. 
D)  confirmation letter.

Question 19

The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties,an auditor (1)must know and intend that the work product would be used by the third-party for a specific purpose,and (2)the knowledge and intent must be evidenced by the auditor's conduct.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following most accurately describes constructive fraud?

Accepted Answer

A)  Absence of reasonable care 
B)  Lack of slight care 
C)  Knowledge and intent to deceive 
D)  Extreme or unusual negligence without the intent to deceive 
A)  Absence of reasonable care 
B)  Lack of slight care 
C)  Knowledge and intent to deceive 
D)  Extreme or unusual negligence without the intent to deceive

Exam 4: Legal Liability Considerations for Auditors

In the performance of an audit,a CPA:

Under the federal securities acts,one significant result occurring directly due to the Escott et al.v.Bar Chris Construction Corporation case was that SAS was changed to require:

A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients.Which one of the following is generally not a defense?

If the CPA negligently failed to properly prepare and file a client's tax return,the CPA may be liable for:

Many litigation experts believe that a well written engagement letter significantly reduces the likelihood of adverse legal actions.

The doctrine of joint and several liability is one factor that has contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

Gross negligence is the existence of extreme or unusual negligence with the intent to deceive.

A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.This is known as the concept of:

The principal issue in cases involving alleged negligence is usually:

Gregory & Hedrick,a medium-sized CPA firm,employed Elise as a staff accountant.Elise was negligent while auditing several of the firm's clients.Under these circumstances,which of the following statements is true?

Companies with securities traded on national and over-the-counter exchanges are required to submit audited financial statements once every three years to the Securities and Exchange Commission.

Under the Securities Exchange Act of 1934,most of the litigation against the auditor has been generated because of the auditor's involvement with the:

The Foreign Corrupt Practices Act (FCPA)of 1977:

Discuss the sanctions the Securities and Exchange Commission can impose on auditors.

A CPA is subject to criminal liability if the CPA:

Discuss three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

A common way for a CPA firm to demonstrate a lack of duty to perform is by use of a(n):

The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties,an auditor (1)must know and intend that the work product would be used by the third-party for a specific purpose,and (2)the knowledge and intent must be evidenced by the auditor's conduct.

Which of the following most accurately describes constructive fraud?

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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