Exam 15: Legal Liability

Joint and several liability is a doctrine that allows a successful plaintiff to recover the full amount of a damage award from any defendant regardless of the defendant's level of culpability.

Locke,CPA was engaged by Hall,Inc.to audit Willow Company.Hall purchased Willow after receiving Willow's audited financial statements,which included Locke's unqualified auditors' opinion.Locke was negligent in the performance of the Willow audit engagement; this negligence was caused by failure to perform the engagement in accordance with the terms of the engagement letter.As a result of Locke's negligence,Hall suffered damages of $75,000.Hall appears to have grounds to sue Locke for

The Private Litigation Securities Reform Act adopted the doctrine of _____________________________ liability,which bases damages on the extent of fault exhibited by a convicted defendant.

When accountants agree to perform a compilation or review of unaudited financial statements,the best way to avoid clients misunderstanding the nature of the work is to describe it completely in

Tort actions cover civil complaints other than breach of contract (such as failure to exercise the appropriate level of professional care).

Users of financial statements have a different perception concerning the nature of auditors' services than the actual objectives of an audit.This difference is known as

Under SEC Rule 10b-5,the plaintiff must prove _____________________________ (or mental state embracing the intent to deceive)in order to impose liability on auditors.

A third party who is known by name to auditors is referred to as a(n)__________________________________.

An investor seeking to recover stock market losses from a CPA firm associated with an initial offering of securities based on an unqualified opinion on financial statements that accompanied a registration statement,must establish that

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

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

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?

The Private Securities Litigation Reform Act deals with lawsuits in both federal and state courts.

N.Lauren hires D.Humphrey, CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are needed for a filing with a regulatory body. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves a loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming that

Individuals who believe they relied on misstated financial statements to make a decision and have suffered losses as a result will issue an action known as a

West & Co.,CPAs,rendered an unqualified opinion on the financial statements of Pride Corp.,which were included in Pride's registration statement filed with the SEC.Subsequently,Hex purchased 500 shares of Pride's preferred stock as part of a public offering subject to the Securities Act of 1933.Hex has commenced an action against West based on the Securities Act of 1933 for losses resulting from misstatements of facts in the financial statements included in the registration statement. Which of the following defenses would be least helpful to West in avoiding liability to Hex?

Section 11 of the Securities Act of 1933 contains the principal criteria defining civil liabilities under the statute.

The restatement of torts extends liability for ordinary negligence to "foreseen" third parties who may not be explicitly known to auditors.

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

In a common law action against auditors,lack of privity is a viable defense if the plaintiff