Question 1

An audit failure occurs when

Accepted Answer

A)  A client goes bankrupt or has serious financial difficulty. 
B)  Auditors fail to conduct the examination in accordance with generally accepted auditing standards, which results in the failure to identify material misstatements in the financial statements. 
C)  Auditors cannot collect audit fees owed to them by the client. 
D)  Auditors are sued by a third party. 
A)  A client goes bankrupt or has serious financial difficulty. 
B)  Auditors fail to conduct the examination in accordance with generally accepted auditing standards, which results in the failure to identify material misstatements in the financial statements. 
C)  Auditors cannot collect audit fees owed to them by the client. 
D)  Auditors are sued by a third party.

Question 2

N.Lauren hires D. Humphrey, CPA, to provide an audit of her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to financial institutions for a loan but does not name any financial institution. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming that

Accepted Answer

A)  It was in privity of the contract. 
B)  It was a primary beneficiary. 
C)  It was a foreseen party. 
D)  It was a foreseeable party. 
A)  It was in privity of the contract. 
B)  It was a primary beneficiary. 
C)  It was a foreseen party. 
D)  It was a foreseeable party.

Question 3

Which of the following factorswould not influence third parties' abilities to bring suit against auditors for ordinary negligence under common law?

Accepted Answer

A)  The extent to which the third party relied upon the misstated financial statements and this reliance resulted in their loss. 
B)  The nature of the activity by the auditors that resulted in their failure to exercise appropriate levels of professional care. 
C)  The relationship between the auditors and a third party. 
D)  The jurisdiction in which the action occurred. 
A)  The extent to which the third party relied upon the misstated financial statements and this reliance resulted in their loss. 
B)  The nature of the activity by the auditors that resulted in their failure to exercise appropriate levels of professional care. 
C)  The relationship between the auditors and a third party. 
D)  The jurisdiction in which the action occurred.

Question 4

Which of the following would third parties not need to demonstrate when bringing suit against auditors for losses sustained under the Securities Act of 1933?

Accepted Answer

A)  Auditors were aware of the materially misstated financial statements. 
B)  Third-party purchasers suffered a loss. 
C)  The client's financial statements contained a material misstatement. 
D)  Purchasers would need to demonstrate all of the above. 
A)  Auditors were aware of the materially misstated financial statements. 
B)  Third-party purchasers suffered a loss. 
C)  The client's financial statements contained a material misstatement. 
D)  Purchasers would need to demonstrate all of the above.

Question 5

Under the liability provisions of section 11 of the Securities Act of 1933,auditors may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the registration statement.Under section 11,auditors usually are not liable to the purchaser

Accepted Answer

A)  If they can show contributory negligence on the part of the purchaser. 
B)  If they can demonstrate due diligence. 
C)  Unless the purchaser can prove privity with the auditors. 
D)  Unless the purchaser can prove scienter on the part of the auditors. 
A)  If they can show contributory negligence on the part of the purchaser. 
B)  If they can demonstrate due diligence. 
C)  Unless the purchaser can prove privity with the auditors. 
D)  Unless the purchaser can prove scienter on the part of the auditors.

Question 6

To be successful in a civil action under section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement,the plaintiff must prove the

Accepted Answer

A)  Auditors' intent to deceive, yes; plaintiff's reliance on the registration statement, yes. 
B)  Auditors' intent to deceive, yes; plaintiff's reliance on the registration statement, no. 
C)  Auditors' intent to deceive, no; plaintiff's reliance on the registration statement, yes. 
D)  Auditors' intent to deceive, no; plaintiff's reliance on the registration statement, no. 
A)  Auditors' intent to deceive, yes; plaintiff's reliance on the registration statement, yes. 
B)  Auditors' intent to deceive, yes; plaintiff's reliance on the registration statement, no. 
C)  Auditors' intent to deceive, no; plaintiff's reliance on the registration statement, yes. 
D)  Auditors' intent to deceive, no; plaintiff's reliance on the registration statement, no.

Question 7

Actions brought under common law place most of the burden of proof on the defendant,usually auditors.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements regarding auditors' liability under the Securities Act of 1933 is not true?

Accepted Answer

A)  The act relates to the initial issuance of securities to the public, normally through an initial public offering. 
B)  Auditors' liability arises because of audited financial information filed with the SEC. 
C)  Third parties must demonstrate that they relied on misstated financial statements that were examined by auditors. 
D)  Auditors may be liable if they are found to have engaged in ordinary negligence. 
A)  The act relates to the initial issuance of securities to the public, normally through an initial public offering. 
B)  Auditors' liability arises because of audited financial information filed with the SEC. 
C)  Third parties must demonstrate that they relied on misstated financial statements that were examined by auditors. 
D)  Auditors may be liable if they are found to have engaged in ordinary negligence.

Question 9

Elliot Corp.is interested in purchasing Roger Corp.Prior to the purchase,Elliot hired Adam & Co.to audit Roger's financial statements.During the audit,Adam failed to discover a fraud that resulted in material misstatements in Roger's financial statements.After the acquisition,the fraud was discovered,and Elliot Corp.suffered substantial losses.To sue Adam & Co.,Elliot must prove that Adam

Accepted Answer

A)  Acted recklessly or with lack of reasonable grounds for belief. 
B)  Knew of the instances of fraud. 
C)  Failed to exercise the appropriate level of professional care. 
D)  Demonstrated gross negligence. 
A)  Acted recklessly or with lack of reasonable grounds for belief. 
B)  Knew of the instances of fraud. 
C)  Failed to exercise the appropriate level of professional care. 
D)  Demonstrated gross negligence.

Question 10

The primary defense for auditors against a claim of ordinary negligence is to offer evidence that the

Accepted Answer

A)  Audit was conducted in accordance with GAAS. 
B)  Plaintiff was not in privity or not foreseen. 
C)  Financial statements did not contain a material misstatement. 
D)  Plaintiff contributed to the negligence. 
A)  Audit was conducted in accordance with GAAS. 
B)  Plaintiff was not in privity or not foreseen. 
C)  Financial statements did not contain a material misstatement. 
D)  Plaintiff contributed to the negligence.

Question 11

Legal liabilities of auditors may arise from lawsuits brought on the basis of the law of contracts or as tort actions.

Accepted Answer

A) True 
 B)False

Question 12

Distinguish between the "due diligence" and the "causation" defenses available to auditors under section 11 of the Securities Act of 1933.

Accepted Answer

Section 11(b)describes the due diligence

Question 13

Which of the following cases upheld the requirement that plaintiffs demonstrate scienter when bringing action under the Securities Exchange Act of 1934?

Accepted Answer

A)  Ernst & Ernst v. Hochfelder. 
B)  Escott v. BarChris Construction Corp. 
C)  Smith v. London Assurance Corp. 
D)  Ultramares. 
A)  Ernst & Ernst v. Hochfelder. 
B)  Escott v. BarChris Construction Corp. 
C)  Smith v. London Assurance Corp. 
D)  Ultramares.

Question 14

As a defense under Rule 10b-5,auditors must prove that they acted in good faith and had no knowledge of the material misstatements in the financial statements.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages?

Accepted Answer

A)  Gross negligence amounting to constructive fraud. 
B)  Failure to investigate possible fraud when other entities in the industry have experienced frauds. 
C)  Reckless disregard of evidence that the financial statements do not conform to generally accepted accounting principles. 
D)  Issuing an unqualified auditors' opinion when evidence suggests that the financial statements were not prepared according to generally accepted accounting principles. 
A)  Gross negligence amounting to constructive fraud. 
B)  Failure to investigate possible fraud when other entities in the industry have experienced frauds. 
C)  Reckless disregard of evidence that the financial statements do not conform to generally accepted accounting principles. 
D)  Issuing an unqualified auditors' opinion when evidence suggests that the financial statements were not prepared according to generally accepted accounting principles.

Question 16

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 elements must Hex prove to hold West liable?

Accepted Answer

A)  West rendered its opinion with knowledge of material misstatements. 
B)  West performed the audit negligently. 
C)  Hex relied on the financial statements included in the registration statement. 
D)  The misstatements were material. 
A)  West rendered its opinion with knowledge of material misstatements. 
B)  West performed the audit negligently. 
C)  Hex relied on the financial statements included in the registration statement. 
D)  The misstatements were material.

Question 17

When bringing suit against auditors under section 10(b)of the Securities Exchange Act of 1934,plaintiffs must allege and prove that

Accepted Answer

A)  The financial statements in the offering registration filing contained a material misstatement. 
B)  The auditors were aware of material misstatements in the financial statements. 
C)  The auditors were guilty of ordinary negligence and failed to discover material misstatements in the financial statements. 
D)  The plaintiffs purchased the specific securities through a public offering and thus have a right to sue. 
A)  The financial statements in the offering registration filing contained a material misstatement. 
B)  The auditors were aware of material misstatements in the financial statements. 
C)  The auditors were guilty of ordinary negligence and failed to discover material misstatements in the financial statements. 
D)  The plaintiffs purchased the specific securities through a public offering and thus have a right to sue.

Question 18

Kerry CPA is the auditor for Sammy Corp.During the audit,Kerry discovers a material misstatement in Sammy's financial statements.Sammy's management tells Kerry that if the misstatement is corrected or if Kerry issues an opinion that indicates there is a material misstatement,Sammy Corp.will likely have to declare bankruptcy and thousands of employees will lose their jobs.Which of the following statements is true if Sammy does not correct the misstatement and Kerry issues an unqualified opinion on Sammy's financial statements?

Accepted Answer

A)  Kerry is liable only to third parties in privity of contract. 
B)  Kerry is liable only to known users of the financial statements. 
C)  Kerry is likely liable to any person who suffered a loss as a result of the material misstatement. 
D)  Kerry is likely liable to third parties only if the third parties were aware of the material misstatements and relied on the financial statements. 
A)  Kerry is liable only to third parties in privity of contract. 
B)  Kerry is liable only to known users of the financial statements. 
C)  Kerry is likely liable to any person who suffered a loss as a result of the material misstatement. 
D)  Kerry is likely liable to third parties only if the third parties were aware of the material misstatements and relied on the financial statements.

Question 19

The SEC Rule 10b-5 deals with

Accepted Answer

A)  Fraud in the purchase or sale of securities. 
B)  Penalties for willfully and knowingly violating the Securities Exchange Act of 1934. 
C)  The use of the "due diligence" defense to avoid liability. 
D)  Integrated disclosure system for annual reports. 
A)  Fraud in the purchase or sale of securities. 
B)  Penalties for willfully and knowingly violating the Securities Exchange Act of 1934. 
C)  The use of the "due diligence" defense to avoid liability. 
D)  Integrated disclosure system for annual reports.

Question 20

The Ernst & Ernst v.___________________ case concluded that auditors might be liable for gross negligence under the Securities Exchange Act of 1934 even in the absence of scienter.

Accepted Answer

The answer of The Ernst & Ernst v.___________________ case concluded...

An audit failure occurs when

Which of the following factorswould not influence third parties' abilities to bring suit against auditors for ordinary negligence under common law?

Which of the following would third parties not need to demonstrate when bringing suit against auditors for losses sustained under the Securities Act of 1933?

Under the liability provisions of section 11 of the Securities Act of 1933,auditors may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the registration statement.Under section 11,auditors usually are not liable to the purchaser

To be successful in a civil action under section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement,the plaintiff must prove the

Actions brought under common law place most of the burden of proof on the defendant,usually auditors.

Which of the following statements regarding auditors' liability under the Securities Act of 1933 is not true?

The primary defense for auditors against a claim of ordinary negligence is to offer evidence that the

Legal liabilities of auditors may arise from lawsuits brought on the basis of the law of contracts or as tort actions.

Distinguish between the "due diligence" and the "causation" defenses available to auditors under section 11 of the Securities Act of 1933.

Which of the following cases upheld the requirement that plaintiffs demonstrate scienter when bringing action under the Securities Exchange Act of 1934?

As a defense under Rule 10b-5,auditors must prove that they acted in good faith and had no knowledge of the material misstatements in the financial statements.

Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages?

When bringing suit against auditors under section 10(b)of the Securities Exchange Act of 1934,plaintiffs must allege and prove that

The SEC Rule 10b-5 deals with

The Ernst & Ernst v.___________________ case concluded that auditors might be liable for gross negligence under the Securities Exchange Act of 1934 even in the absence of scienter.

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

An audit failure occurs when

Which of the following factorswould not influence third parties' abilities to bring suit against auditors for ordinary negligence under common law?

Which of the following would third parties not need to demonstrate when bringing suit against auditors for losses sustained under the Securities Act of 1933?

Under the liability provisions of section 11 of the Securities Act of 1933,auditors may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the registration statement.Under section 11,auditors usually are not liable to the purchaser

To be successful in a civil action under section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement,the plaintiff must prove the

Actions brought under common law place most of the burden of proof on the defendant,usually auditors.

Which of the following statements regarding auditors' liability under the Securities Act of 1933 is not true?

The primary defense for auditors against a claim of ordinary negligence is to offer evidence that the

Legal liabilities of auditors may arise from lawsuits brought on the basis of the law of contracts or as tort actions.

Distinguish between the "due diligence" and the "causation" defenses available to auditors under section 11 of the Securities Act of 1933.

Which of the following cases upheld the requirement that plaintiffs demonstrate scienter when bringing action under the Securities Exchange Act of 1934?

As a defense under Rule 10b-5,auditors must prove that they acted in good faith and had no knowledge of the material misstatements in the financial statements.

Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages?

When bringing suit against auditors under section 10(b)of the Securities Exchange Act of 1934,plaintiffs must allege and prove that

The SEC Rule 10b-5 deals with

The Ernst & Ernst v.___________________ case concluded that auditors might be liable for gross negligence under the Securities Exchange Act of 1934 even in the absence of scienter.

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