Question 1

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

Accepted Answer

A) The plaintiff must prove damages or an economic loss. 
B) The plaintiff must prove they read and relied upon the financial statements. 
C) Any purchaser of securities may sue auditors. 
D) The plaintiff need not prove that the materially misstated financial statements are the direct cause of the loss. 
A) The plaintiff must prove damages or an economic loss. 
B) The plaintiff must prove they read and relied upon the financial statements. 
C) Any purchaser of securities may sue auditors. 
D) The plaintiff need not prove that the materially misstated financial statements are the direct cause of the loss. B

Question 2

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. B

Question 3

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. B

Question 4

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,Larson's 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) Identity of the purchaser was not known to Larson 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) Identity of the purchaser was not known to Larson at the time of the audit.

Question 5

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

Accepted Answer

Under proportionate liability,a defendan

Question 6

Under the liability provisions of section 11 of the Securities Act of 1933,auditors may be liable to any purchaser of securities for certifying materially misstated financial statements that are included in the registration statement.Under section 11,which of the following must be proven by a purchaser of the security?

Accepted Answer

A) Reliance on financial statements: Yes; Fraud by auditors: Yes 
B) Reliance on financial statements: Yes; Fraud by auditors: No 
C) Reliance on financial statements: No; Fraud by auditors: Yes 
D) Reliance on financial statements: No; Fraud by auditors: No 
A) Reliance on financial statements: Yes; Fraud by auditors: Yes 
B) Reliance on financial statements: Yes; Fraud by auditors: No 
C) Reliance on financial statements: No; Fraud by auditors: Yes 
D) Reliance on financial statements: No; Fraud by auditors: No

Question 7

According to Sarbanes-Oxley,accountants performing an audit or review must maintain all engagement documentation for a period of

Accepted Answer

A) 2 years 
B) 3 years 
C) 5 years 
D) 7 years 
A) 2 years 
B) 3 years 
C) 5 years 
D) 7 years

Question 8

The restatement of torts is a general legal doctrine that extends liability for ordinary negligence to

Accepted Answer

A) Foreseeable third parties. 
B) Foreseen third parties. 
C) Primary beneficiaries. 
D) All users of financial statements. 
A) Foreseeable third parties. 
B) Foreseen third parties. 
C) Primary beneficiaries. 
D) All users of financial statements.

Question 9

Lancaster & Co. CPAs is auditing the financial statements of Cooper Corporation. During the course of the audit, Cooper Corporation sent the following memo to the engagement partner:
We have requested $1 million worth of products from Ladd Corporation with credit terms of net 30 days. Ladd has requested audited financial statements for its credit decision. We notified Ladd that our annual audit was in process and we would provide the audited financial statements to them as soon as they were completed.
Which of the following statements is true with regards to this memo?

Accepted Answer

A) The memo is an amendment to the engagement letter and makes Ladd Corporation a primary beneficiary of the audited financial statements. 
B) The memo may move Ladd Corporation closer to a primary beneficiary and reposition them as third party with a standing to sue, depending on the jurisdiction of any future lawsuits 
C) The memo is only a courtesy and does not alter the terms of the engagement letter or change the nature of Ladd Corporation’s standing to sue. 
D) The memo is an additional contract placing Ladd in privity of contract. 
A) The memo is an amendment to the engagement letter and makes Ladd Corporation a primary beneficiary of the audited financial statements. 
B) The memo may move Ladd Corporation closer to a primary beneficiary and reposition them as third party with a standing to sue, depending on the jurisdiction of any future lawsuits 
C) The memo is only a courtesy and does not alter the terms of the engagement letter or change the nature of Ladd Corporation’s standing to sue. 
D) The memo is an additional contract placing Ladd in privity of contract.

Question 10

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 11

Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?

Accepted Answer

A) Contributory negligence on the part of the client. 
B) A disclaimer contained in the engagement letter. 
C) Lack of privity. 
D) Lack of scienter. 
A) Contributory negligence on the part of the client. 
B) A disclaimer contained in the engagement letter. 
C) Lack of privity. 
D) Lack of scienter.

Question 12

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 will not be liable to the purchaser

Accepted Answer

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

Question 13

Under the Securities Act of 1933,which of the following defenses is related to auditors performing a reasonable investigation of the financial statements?

Accepted Answer

A) Causation 
B) Contributory negligence 
C) Due diligence 
D) Prudent auditor 
A) Causation 
B) Contributory negligence 
C) Due diligence 
D) Prudent auditor

Question 14

Lauren hires Humphrey,a 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 institutions.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:

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 15

Charlie Company is headquartered in Wisconsin.Charlie Company's auditors are headquartered in Minnesota.Bob lives in Bloomington,Indiana but works in Chicago,Illinois.Based on a tip from his boss,Bob calls his stockbroker (Jim,who offices 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 Company is traded on the New York Stock Exchange and the transaction takes place 15 minutes later on the floor of the exchange.
Charlie Company declared bankruptcy three months later and Bob lost his 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,since the transaction between Bob and Jim took place in Illinois.The attorney asks that the trial be moved to Illinois.
Required A.Why would the attorney ask for the trial to be moved?
B.What defense would you raise if you were the auditors' attorney?

Accepted Answer

A.Third parties have different standing

Question 16

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 17

At the request of James Company's management,E.G.audited James Company's financial statements and was aware that James' management intended to deliver the financial statements to its 25 shareholders for the purpose of repurchasing their shares for $50 per share (the investors had originally purchased the shares for $5 per share).The audit was conducted in accordance with generally accepted auditing standards and the financial statements were prepared in accordance with generally accepted accounting principles.Later,the shareholders sued the auditors,claiming that if they fully realized the significance of disclosures about the market value of the assets,they could have received $75 per share from James Company.The shareholders' lawsuit will probably fail because:

Accepted Answer

A) The shareholders did not suffer a loss. 
B) The shareholders were not primary beneficiaries of the audit engagement and they have no standing to sue. 
C) The shareholders failed to prove lack of appropriate professional care on the part of auditors. 
D) The shareholders did not rely properly on the financial statements. 
A) The shareholders did not suffer a loss. 
B) The shareholders were not primary beneficiaries of the audit engagement and they have no standing to sue. 
C) The shareholders failed to prove lack of appropriate professional care on the part of auditors. 
D) The shareholders did not rely properly on the financial statements.

Question 18

Which of the following factors would 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 activity by auditors that resulted in their failure to exercise appropriate levels of professional care. 
C) The relationship between the auditors and 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 activity by auditors that resulted in their failure to exercise appropriate levels of professional care. 
C) The relationship between the auditors and third party. 
D) The jurisdiction in which the action occurred.

Question 19

The Securities Act of 1933

Accepted Answer

A) Regulates trading in securities. 
B) Approves and guarantees investments. 
C) Regulates the initial issuance of securities. 
D) Regulates the accounting profession. 
A) Regulates trading in securities. 
B) Approves and guarantees investments. 
C) Regulates the initial issuance of securities. 
D) Regulates the accounting profession.

Question 20

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.

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

An audit failure occurs when

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

According to Sarbanes-Oxley,accountants performing an audit or review must maintain all engagement documentation for a period of

The restatement of torts is a general legal doctrine that extends liability for ordinary negligence to

The SEC Rule 10b-5 deals with

Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?

Under the Securities Act of 1933,which of the following defenses is related to auditors performing a reasonable investigation of the financial statements?

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

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

The Securities Act of 1933

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

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 Audits, Governmental Audits, and Fraud Examinations

Overview of Sampling

Attributes Sampling

Variables Sampling

Auditing and Information Technology

Filters

Exam 15: Legal Liability

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

An audit failure occurs when

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

According to Sarbanes-Oxley,accountants performing an audit or review must maintain all engagement documentation for a period of

The restatement of torts is a general legal doctrine that extends liability for ordinary negligence to

The SEC Rule 10b-5 deals with

Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?

Under the Securities Act of 1933,which of the following defenses is related to auditors performing a reasonable investigation of the financial statements?

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

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

The Securities Act of 1933

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

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 Audits, Governmental Audits, and Fraud Examinations

Overview of Sampling

Attributes Sampling

Variables Sampling

Auditing and Information Technology

Filters