Question 1

Auditors should not be liable to any party if they perform services that met the standards of:

Accepted Answer

A) Ordinary negligence. 
B) Regulatory providence. 
C) Due care. 
D) Good faith. 
A) Ordinary negligence. 
B) Regulatory providence. 
C) Due care. 
D) Good faith.

Question 2

Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act?

Accepted Answer

A) The total responsibility for loss is divided among all parties responsible for the loss. 
B) Defendants who knowingly committed a violation of securities laws remain jointly and severally liable. 
C) The full amount of damages may be recovered from any defendants involved in the action. 
D) A solvent defendant's liability may be increased by 50 percent if other defendants are insolvent. 
A) The total responsibility for loss is divided among all parties responsible for the loss. 
B) Defendants who knowingly committed a violation of securities laws remain jointly and severally liable. 
C) The full amount of damages may be recovered from any defendants involved in the action. 
D) A solvent defendant's liability may be increased by 50 percent if other defendants are insolvent.

Question 3

Which of the following is not a valid defense for auditors' liability to third parties for ordinary negligence under common law?

Accepted Answer

A) The loss was caused by factors other than the materially misstated financial statements 
B) Lack of proper standing (relationship)to bring suit in that jurisdiction. 
C) Lack of a privity relationship with auditors 
D) Third parties did not rely upon the financial statements 
A) The loss was caused by factors other than the materially misstated financial statements 
B) Lack of proper standing (relationship)to bring suit in that jurisdiction. 
C) Lack of a privity relationship with auditors 
D) Third parties did not rely upon the financial statements

Question 4

The first significant case under section 11 of the Securities Act of 1933 charging auditors with not conducting a reasonable investigation was

Accepted Answer

A) Rusch Factors v.Levin 
B) United States v.Benjamin 
C) Escott v.BarChris Construction Corp. 
D) Ernst & Ernst v.Hochfelder 
A) Rusch Factors v.Levin 
B) United States v.Benjamin 
C) Escott v.BarChris Construction Corp. 
D) Ernst & Ernst v.Hochfelder

Question 5

Sleek Corporation is a public corporation whose stock is traded on a national securities exchange.Sleek hired Garson Associates,CPAs,to audit Sleek's financial statements.Sleek needed the audit to obtain bank loans and to make a public stock offering so that Sleek could undertake a business expansion program.
Before the engagement,Fred Hedge,Sleek's president,told Garson's managing partner that the audited financial statements would be submitted to Sleek's banks to obtain the necessary loans.
During the course of the audit,Garson's managing partner found that Hedge and other Sleek officers had embezzled substantial amounts of money from the corporation.These embezzlements threatened Sleek's financial stability.When these findings were brought to Hedge's attention,Hedge promised that the money would be repaid and begged Garson not to disclose the embezzlements.
Hedge also told Garson's managing partner that several friends and relatives of Sleek's officers had been advised about the projected business expansion and proposed stock offering,and had purchased significant amounts of Sleek's stock based on this information.
Garson submitted an unqualified opinion on Sleek's financial statements,which did not include adjustments for or disclosures of the embezzlements and insider stock transactions.The financial statements and auditors' opinion were submitted to the banks Sleek normally does business with,including Knox Bank.Knox,relying on the financial statements and the auditors' report,loaned Sleek $2,000,000.
Sleek's audited financial statements were also included in a registration statement prepared under the provisions of the Securities Act of 1933.The registration statement was filed with the SEC in conjunction with Sleek's public offering of 100,000 shares of its common stock at $100 per share.
An SEC investigation of Sleek disclosed the embezzlements and the insider trading.Trading in Sleek's stock was suspended and Sleek defaulted on the Knox loan.As a result,the following legal actions were taken:
-Knox Bank sued Garson.
-The purchasers of Sleek's stock offering sued Garson.
Required:
a.Would Knox recover from Garson for fraud?
b.Would the purchasers of Sleek's stock offering recover from Garson
1.Under the liability provisions of section 11 of the Securities Act of 1933?
2.Under the antifraud provisions of section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934?

Accepted Answer

a.Knox would recover from Garson for fra

Question 6

Under the anti-fraud 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 7

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

Accepted Answer

A) The financial statements in the offering registration filing contained a material misstatement. 
B) Auditors were aware of material misstatements in the financial statements. 
C) 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) Auditors were aware of material misstatements in the financial statements. 
C) 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 8

Sun Corp.approved a merger plan with Cord Corp.One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co.,CPAs.Sun had engaged Frank to audit Cord's financial statements.While performing the audit,Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses.For Frank to be liable under common law liability,Sun at a minimum must prove that Frank

Accepted Answer

A) Knew of the irregularities. 
B) Failed to exercise the appropriate level of professional care. 
C) Demonstrated gross negligence. 
D) Acted with scienter. 
A) Knew of the irregularities. 
B) Failed to exercise the appropriate level of professional care. 
C) Demonstrated gross negligence. 
D) Acted with scienter.

Question 9

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

Question 10

To prevail in an action brought under common law,the plaintiff must show all of the following except:

Accepted Answer

A) He or she was damaged or suffered a loss 
B) The financial statements contained a material misstatement 
C) Auditors knew the financial statements contained a material misstatement 
D) He or she relied on the financial statements 
A) He or she was damaged or suffered a loss 
B) The financial statements contained a material misstatement 
C) Auditors knew the financial statements contained a material misstatement 
D) He or she relied on the financial statements

Question 11

If an audit is performed for the benefit of a specific person or organization,that person or organization is known as a(n)

Accepted Answer

A) Party to the contract 
B) Primary beneficiary 
C) Foreseeable third party 
D) Prime benefactor 
A) Party to the contract 
B) Primary beneficiary 
C) Foreseeable third party 
D) Prime benefactor

Question 12

Which of the following is not a reason that the Class Action Fairness Act of 2005 will benefit auditors in class action lawsuits?

Accepted Answer

A) Federal courts provide a higher level of scrutiny for class action lawsuits than state courts 
B) Federal courts have more resources at their disposal for managing class action lawsuits 
C) State courts may discriminate against defendants from other jurisdictions 
D) Verdicts in state courts are normally more appropriate to apply to multiple jurisdictions than verdicts in federal courts 
A) Federal courts provide a higher level of scrutiny for class action lawsuits than state courts 
B) Federal courts have more resources at their disposal for managing class action lawsuits 
C) State courts may discriminate against defendants from other jurisdictions 
D) Verdicts in state courts are normally more appropriate to apply to multiple jurisdictions than verdicts in federal courts

Question 13

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 the misstatement is not corrected 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 fraud. 
D) Kerry is likely liable to third parties even if the third parties were aware of the fraud and did not rely on the opinion. 
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 fraud. 
D) Kerry is likely liable to third parties even if the third parties were aware of the fraud and did not rely on the opinion.

Question 14

Lauren hires Humphrey,a CPA,to audit her financial statements.The engagement letter includes a statement acknowledging that audited financial statements will be provided to Key Largo Bank for a loan.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

Elliot Corp.is interested in purchasing Roger Corp.Prior to the purchase Elliot hired Adam & Co.to audit the financial statements of Roger.During the audit,Adam & Co.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.If Elliot sues Adam & Co.,Elliot must prove that Adam & Co:

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 16

While conducting an audit of a public entity,Wallace failed to identify material misstatements in its client's financial statements.Investors then sued Wallace in connection with this audit.Which of the following would not need to be demonstrated in order for the shareholders to successfully bring suit against Wallace?

Accepted Answer

A) Wallace was in privity with the shareholders. 
B) The shareholders relied upon the materially misstated financial statements. 
C) Wallace acted with gross negligence in his audit. 
D) The reliance on the materially misstated financial statements caused the shareholders' losses. 
A) Wallace was in privity with the shareholders. 
B) The shareholders relied upon the materially misstated financial statements. 
C) Wallace acted with gross negligence in his audit. 
D) The reliance on the materially misstated financial statements caused the shareholders' losses.

Question 17

Lauren hires Humphrey,a 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:

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 18

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

Accepted Answer

A) Gross negligence in conducting the engagement. 
B) Ordinary negligence in conducting the engagement. 
C) Failure to perform the engagement in accordance with the terms in the engagement letter. 
D) Actions that demonstrated scienter. 
A) Gross negligence in conducting the engagement. 
B) Ordinary negligence in conducting the engagement. 
C) Failure to perform the engagement in accordance with the terms in the engagement letter. 
D) Actions that demonstrated scienter.

Question 19

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

Accepted Answer

A) Is the client's creditor who sues auditors for ordinary negligence. 
B) Can prove gross negligence by auditors that amounts to a reckless disregard for the truth. 
C) Is the auditors' client. 
D) Bases the action upon fraud. 
A) Is the client's creditor who sues auditors for ordinary negligence. 
B) Can prove gross negligence by auditors that amounts to a reckless disregard for the truth. 
C) Is the auditors' client. 
D) Bases the action upon fraud.

Question 20

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.

Auditors should not be liable to any party if they perform services that met the standards of:

Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act?

Which of the following is not a valid defense for auditors' liability to third parties for ordinary negligence under common law?

The first significant case under section 11 of the Securities Act of 1933 charging auditors with not conducting a reasonable investigation was

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

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

To prevail in an action brought under common law,the plaintiff must show all of the following except:

If an audit is performed for the benefit of a specific person or organization,that person or organization is known as a(n)

Which of the following is not a reason that the Class Action Fairness Act of 2005 will benefit auditors in class action lawsuits?

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

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

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

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

Auditors should not be liable to any party if they perform services that met the standards of:

Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act?

Which of the following is not a valid defense for auditors' liability to third parties for ordinary negligence under common law?

The first significant case under section 11 of the Securities Act of 1933 charging auditors with not conducting a reasonable investigation was

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

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

To prevail in an action brought under common law,the plaintiff must show all of the following except:

If an audit is performed for the benefit of a specific person or organization,that person or organization is known as a(n)

Which of the following is not a reason that the Class Action Fairness Act of 2005 will benefit auditors in class action lawsuits?

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

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

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

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