Question 1

When investors sue for damages under section 11 of the Securities Act of 1933,they must allege and prove

Accepted Answer

A)  Scienter on the part of auditors. 
B)  The audited financial statements contained a material misstatement. 
C)  They relied on the materially misstated financial statements. 
D)  Their reliance on the materially misstated financial statements was the direct cause of their loss. 
A)  Scienter on the part of auditors. 
B)  The audited financial statements contained a material misstatement. 
C)  They relied on the materially misstated financial statements. 
D)  Their reliance on the materially misstated financial statements was the direct cause of their loss.

Question 2

Regulation _____________________________ contains accounting requirements for annual and interim financial statements filed under the Securities Act of 1933 and Securities Exchange Act of 1934.

Accepted Answer

The answer of Regulation _____________________________ contains accounting requirements for annual...

Question 3

The landmark case that stated criteria for auditors' liability to third parties for gross negligence or fraud,but not ordinary negligence,was

Accepted Answer

A)  Smith v. London Assurance Corp. 
B)  Ultramares Corp. v. Touche. 
C)  1136 Tenants' Corp. v. Max Rothenberg & Co. 
D)  McKesson & Robbins Inc. 
A)  Smith v. London Assurance Corp. 
B)  Ultramares Corp. v. Touche. 
C)  1136 Tenants' Corp. v. Max Rothenberg & Co. 
D)  McKesson & Robbins Inc.

Question 4

Which of the following third parties is known by name to auditors as the audit is conducted?

Accepted Answer

A)  Foreseeable third party. 
B)  Foreseen third party. 
C)  General third party. 
D)  Primary beneficiary. 
A)  Foreseeable third party. 
B)  Foreseen third party. 
C)  General third party. 
D)  Primary beneficiary.

Question 5

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.In a suit by a purchaser against Larson,its best defense would be that the

Accepted Answer

A)  Audit was conducted in accordance with generally accepted auditing standards. 
B)  Client was aware of the misstatements. 
C)  Purchaser was not in privity of contract with Larson. 
D)  Larson did not know the identity of the purchaser at the time of the audit. 
A)  Audit was conducted in accordance with generally accepted auditing standards. 
B)  Client was aware of the misstatements. 
C)  Purchaser was not in privity of contract with Larson. 
D)  Larson did not know the identity of the purchaser at the time of the audit.

Question 6

___________________________________________ involves cases in which auditors are sued for violating a written law or statute.

Accepted Answer

The answer of ___________________________________________ involves cases in which auditors are...

Question 7

Typical defenses for auditors in common law actions include all of the following except

Accepted Answer

A)  The plaintiff was foreseen. 
B)  The plaintiff contributed to the failure to detect material misstatements. 
C)  The financial statements were not materially misstated. 
D)  The audit was conducted in accordance with generally accepted auditing standards. 
A)  The plaintiff was foreseen. 
B)  The plaintiff contributed to the failure to detect material misstatements. 
C)  The financial statements were not materially misstated. 
D)  The audit was conducted in accordance with generally accepted auditing standards.

Question 8

A.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 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?

Accepted Answer

A)  Abdul Company. 
B)  Purchasers of Abdul's securities in an initial public offering. 
C)  First State Bank, a bank with which Abdul has not previously done business. 
D)  Simon Whitaker, a private investor who is considering acquiring Abdul. 
A)  Abdul Company. 
B)  Purchasers of Abdul's securities in an initial public offering. 
C)  First State Bank, a bank with which Abdul has not previously done business. 
D)  Simon Whitaker, a private investor who is considering acquiring Abdul.

Question 9

In general,which of the following parties would have the lowest burden of proof in bringing suit against an auditor?

Accepted Answer

A)  Clients. 
B)  A lender who meets the definition of a primary beneficiary. 
C)  A third-party investor under the Securities Act. 
D)  A lender who meets the definition of a foreseen third party. 
A)  Clients. 
B)  A lender who meets the definition of a primary beneficiary. 
C)  A third-party investor under the Securities Act. 
D)  A lender who meets the definition of a foreseen third party.

Question 10

Auditors are potentially liable for monetary damages and subject to criminal penalties for failure to perform professional services properly.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A)  With ordinary negligence. 
B)  With independence. 
C)  Without due diligence. 
D)  Without good faith. 
A)  With ordinary negligence. 
B)  With independence. 
C)  Without due diligence. 
D)  Without good faith.

Question 12

Mays bought McCovey Corp.common stock in an offering registered under the Securities Act of 1933.Hart & Co.,CPAs,gave an unqualified opinion on McCovey's financial statements that were included in the registration statement filed with the Securities and Exchange Commission.Mays sued Hart under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement.Mays must prove that

Accepted Answer

A)  There was fraudulent activity by Hart. 
B)  The financial statements contained a material misstatement. 
C)  Mays relied on Hart's opinion. 
D)  Mays was in privity with Hart. 
A)  There was fraudulent activity by Hart. 
B)  The financial statements contained a material misstatement. 
C)  Mays relied on Hart's opinion. 
D)  Mays was in privity with Hart.

Question 13

Which of the following statements is true concerning auditors' responsibilities during the audit?

Accepted Answer

A)  Auditors must exercise the level of care, skill, and judgment expected of a reasonably prudent auditor under the circumstances. 
B)  Auditors must plan the audit to gather sufficient competent evidence to guarantee the accuracy of the financial statements. 
C)  Auditors are strictly liable for failures to discover client fraud. 
D)  Auditors are not liable unless they commit gross negligence or intentionally disregard generally accepted auditing standards. 
A)  Auditors must exercise the level of care, skill, and judgment expected of a reasonably prudent auditor under the circumstances. 
B)  Auditors must plan the audit to gather sufficient competent evidence to guarantee the accuracy of the financial statements. 
C)  Auditors are strictly liable for failures to discover client fraud. 
D)  Auditors are not liable unless they commit gross negligence or intentionally disregard generally accepted auditing standards.

Question 14

A(n)___________________________________ must be filed and must be effective before a sale of securities to the public is lawful.

Accepted Answer

registrati

Question 15

The Private Securities Litigation Reform Act adopted the doctrine of

Accepted Answer

A)  Foreseeable third parties. 
B)  Joint and several liability. 
C)  Proportionate liability. 
D)  Foreseen third parties. 
A)  Foreseeable third parties. 
B)  Joint and several liability. 
C)  Proportionate liability. 
D)  Foreseen third parties.

Question 16

A principle that may reduce or eliminates auditors' liability to clients is

Accepted Answer

A)  Client's constructive negligence. 
B)  Client's contributory negligence. 
C)  Auditors' ordinary negligence. 
D)  Auditors' gross negligence. 
A)  Client's constructive negligence. 
B)  Client's contributory negligence. 
C)  Auditors' ordinary negligence. 
D)  Auditors' gross negligence.

Question 17

Liability to foreseen third parties would expose auditors to a greater potential obligation than liability to foreseeable third parties.

Accepted Answer

A) True 
 B)False

Question 18

What are the legal liabilities of auditors under common law?

Accepted Answer

Legal liabilities of auditors may arise

Question 19

When creditors who relied on an entity's audited financial statements suffer monetary losses after a customer (the auditors' client)goes bankrupt,what must the plaintiff creditors in a lawsuit for damages show in a court that follows the doctrine in Credit Alliance?

Accepted Answer

A)  The auditors knew and specifically acknowledged identification of the creditors. 
B)  The auditors could reasonably foresee them as beneficiaries of the audit because entities such as this client use financial statements to obtain credit from vendors. 
C)  The plaintiffs were foreseen users of the audited financial statements because they were vendors of long standing. 
D)  All of the above. 
A)  The auditors knew and specifically acknowledged identification of the creditors. 
B)  The auditors could reasonably foresee them as beneficiaries of the audit because entities such as this client use financial statements to obtain credit from vendors. 
C)  The plaintiffs were foreseen users of the audited financial statements because they were vendors of long standing. 
D)  All of the above.

Question 20

Charlie Company is headquartered in Wisconsin.Its auditors are headquartered in Minnesota.K.Bob lives in Bloomington,Indiana,but works in Chicago,Illinois.Based on a tip from his boss,Bob called his stockbroker (B.Jim whose office is in Chicago)and instructs him to purchase 1,000 shares of Charlie Company despite never having requested or reviewed Charlie Company's financial statements.Charlie is traded on the New York Stock Exchange,and the transaction took place 15 minutes later on the floor of the exchange.
Charlie Company declared bankruptcy three months later,and Bob lost the entire investment.Bob sued Charlie Company's auditors for ordinary negligence.
The trial is scheduled for hearing in Madison,Wisconsin.Before the opening of the trial,the attorney for the auditors objects to the trial being held in Wisconsin because the transaction between Bob and Jim took place in Illinois.The attorney asks that the trial be moved to Illinois.
Required:
A. Third parties have different standing to sue in different jurisdictions. In Wisconsin, Bob may be able to bring suit against auditors for ordinary negligence as a foreseeable party, but in Illinois, Bob may have to prove he is a foreseen party or allege gross negligence or fraud on the part of auditors in order to have a right to bring suit.
A. Why would the attorney ask for the trial to be moved?
B. The best defense is a lack of causation between the materially misstated financial statements and Bob's loss. Bob never evaluated the financial statements but purchased the stock through a tip from his boss. Auditors may also claim that they performed the audit with due care and according to generally accepted auditing standards.
B. What defense would you raise if you were the auditors' attorney?

Accepted Answer

A.Third parties have different standing

When investors sue for damages under section 11 of the Securities Act of 1933,they must allege and prove

Regulation _____________________________ contains accounting requirements for annual and interim financial statements filed under the Securities Act of 1933 and Securities Exchange Act of 1934.

The landmark case that stated criteria for auditors' liability to third parties for gross negligence or fraud,but not ordinary negligence,was

Which of the following third parties is known by name to auditors as the audit is conducted?

___________________________________________ involves cases in which auditors are sued for violating a written law or statute.

Typical defenses for auditors in common law actions include all of the following except

In general,which of the following parties would have the lowest burden of proof in bringing suit against an auditor?

Auditors are potentially liable for monetary damages and subject to criminal penalties for failure to perform professional services properly.

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

Which of the following statements is true concerning auditors' responsibilities during the audit?

A(n)___________________________________ must be filed and must be effective before a sale of securities to the public is lawful.

The Private Securities Litigation Reform Act adopted the doctrine of

A principle that may reduce or eliminates auditors' liability to clients is

Liability to foreseen third parties would expose auditors to a greater potential obligation than liability to foreseeable third parties.

What are the legal liabilities of auditors under common law?

When creditors who relied on an entity's audited financial statements suffer monetary losses after a customer (the auditors' client)goes bankrupt,what must the plaintiff creditors in a lawsuit for damages show in a court that follows the doctrine in Credit Alliance?

Auditing and Assurance Services

Professional Standards

Engagement Planning

Management Fraud and Audit Risk

Risk Assessment: Internal Control Evaluation

Employee Fraud and the Audit of Cash

Revenue and Collection Cycle

Acquisition and Expenditure Cycle

Production Cycle

Finance and Investment Cycle

Completing the Audit

Reports on Audited Financial Statements

Other Public Accounting Services

Professional Ethics

Internal Governmental and Fraud Audits

Overview of Sampling

Attributes Sampling

Variables Sampling

Auditing in a Computerized Environment

Filters

Exam 15: Legal Liability

When investors sue for damages under section 11 of the Securities Act of 1933,they must allege and prove

Regulation _____________________________ contains accounting requirements for annual and interim financial statements filed under the Securities Act of 1933 and Securities Exchange Act of 1934.

The landmark case that stated criteria for auditors' liability to third parties for gross negligence or fraud,but not ordinary negligence,was

Which of the following third parties is known by name to auditors as the audit is conducted?

___________________________________________ involves cases in which auditors are sued for violating a written law or statute.

Typical defenses for auditors in common law actions include all of the following except

In general,which of the following parties would have the lowest burden of proof in bringing suit against an auditor?

Auditors are potentially liable for monetary damages and subject to criminal penalties for failure to perform professional services properly.

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

Which of the following statements is true concerning auditors' responsibilities during the audit?

A(n)___________________________________ must be filed and must be effective before a sale of securities to the public is lawful.

The Private Securities Litigation Reform Act adopted the doctrine of

A principle that may reduce or eliminates auditors' liability to clients is

Liability to foreseen third parties would expose auditors to a greater potential obligation than liability to foreseeable third parties.

What are the legal liabilities of auditors under common law?

When creditors who relied on an entity's audited financial statements suffer monetary losses after a customer (the auditors' client)goes bankrupt,what must the plaintiff creditors in a lawsuit for damages show in a court that follows the doctrine in Credit Alliance?

Auditing and Assurance Services

Professional Standards

Engagement Planning

Management Fraud and Audit Risk

Risk Assessment: Internal Control Evaluation

Employee Fraud and the Audit of Cash

Revenue and Collection Cycle

Acquisition and Expenditure Cycle

Production Cycle

Finance and Investment Cycle

Completing the Audit

Reports on Audited Financial Statements

Other Public Accounting Services

Professional Ethics

Internal Governmental and Fraud Audits

Overview of Sampling

Attributes Sampling

Variables Sampling

Auditing in a Computerized Environment

Filters