Exam 20: Legal Liability

The Sarbanes-Oxley Act of 2002 grants the PCAOB the ability to undertake two functions over registered public accounting firms and persons associated with such firms. Briefly explain the purpose of the PCAOB, making sure to reference their two major functions.

The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by

Suits are often brought against auditors that allege that the auditors did not detect some type of fraud or defalcation. List the six defenses that the auditors could mount against client negligence claims.

A CPA's duty of due care to a client most likely will be breached when a CPA

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

Which statement is correct concerning an auditor's statutory legal liability?

Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, a material misstatement in the financial statements went undetected. Ocean was unaware of this fact. The financial statements and Ocean's unqualified opinion were included in a registration statement and prospectus for an initial public offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the prospectus prior to the purchase but did not read it. The shares declined in value as a result of the misstatements in Drain's financial statements becoming known. Under which of the following acts is Sharp most likely to prevail in a lawsuit against Ocean?

In general, the third-party (primary) beneficiary rule as applied to a CPA's legal liability in conducting an audit is relevant to which of the following causes of action against a CPA?

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?

Which of the following is not one of the four general stages in the initiation and disposition of audit-related disputes?

Auditors can be held liable under two classes of law when sued by clients, investors, creditors, or the government. Identify and briefly explain both classes of law.

Ritz Corporation wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale. Based on the audited financial statements and Fein's unqualified opinion, Ritz acquired Stale. Within 6 months, it was discovered that the inventory of Stale had been overstated by $500,000. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality, but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that the inventory was overstated. Which of the following two causes of action would provide Ritz with proper bases upon which Ritz would most likely prevail?

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 suit by a purchaser against Larson for common-law fraud, Larson's best defense would be that

Ford & Co., CPAs, issued an unqualified opinion on Owens Corp.'s financial statements. Relying on these financial statements, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the financial statements or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common law fraud action against Ford, Century must prove, in addition to other elements, that Century was

An auditor, using the same degree of due care as other members of the profession, fails to identify an inadequate allowance for bad debts. This occurrence is an example of

Why are plaintiffs motivated to bring actions under RICO?

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?

Hark, CPA, failed to follow generally accepted auditing standards in auditing Long Corp.'s financial statements. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the Ultramares doctrine, if Third sues Hark, Hark will

A tort is a breach of contract for which civil action may be taken.

Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA?