Question 1

A case by a client against its CPA firm alleging negligence would be brought under:

Accepted Answer

A) The Securities Act of 1933. 
B) The Securities Exchange Act of 1934. 
C) The state blue sky laws. 
D) Common law. 
A) The Securities Act of 1933. 
B) The Securities Exchange Act of 1934. 
C) The state blue sky laws. 
D) Common law. D

Question 2

CPAs should not be liable to any party if they perform their services with:

Accepted Answer

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

Question 3

Which of the following forms of organization is most likely to protect the personal assets of any partner,or shareholder who has not been involved on an engagement resulting in litigation?

Accepted Answer

A) Professional corporation. 
B) Limited liability partnership. 
C) Partnership. 
D) Subchapter M Incorporation. 
A) Professional corporation. 
B) Limited liability partnership. 
C) Partnership. 
D) Subchapter M Incorporation. B

Question 4

Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995?

Accepted Answer

A) It provides certain small investors better recovery rights than it does large investors. 
B) It retains joint and several liability in certain circumstances. 
C) It makes recovery against CPAs more difficult under common law litigation. 
D) It eliminates securities fraud as an offense under civil RICO. 
A) It provides certain small investors better recovery rights than it does large investors. 
B) It retains joint and several liability in certain circumstances. 
C) It makes recovery against CPAs more difficult under common law litigation. 
D) It eliminates securities fraud as an offense under civil RICO.

Question 5

If a CPA recklessly departs from the standards of due care when conducting an audit,the CPA will be liable to third parties who are unknown to the CPA based on:

Accepted Answer

A) Ordinary negligence. 
B) Gross negligence. 
C) Strict liability. 
D) Criminal deceit. 
A) Ordinary negligence. 
B) Gross negligence. 
C) Strict liability. 
D) Criminal deceit.

Question 6

Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?

Accepted Answer

A) Due Diligence Approach. 
B) Ultramares Approach. 
C) Restatement of Torts Approach. 
D) Rosenblum Approach. 
A) Due Diligence Approach. 
B) Ultramares Approach. 
C) Restatement of Torts Approach. 
D) Rosenblum Approach.

Question 7

Starr Corp.approved a plan of merger with Silo Corp.One of the determining factors in approving the merger was the strong financial statements of Silo which were audited by Cox & Co.,CPAs.Starr had engaged Cox to audit Silo's financial statements.While performing the audit,Cox failed to discover certain instances of fraud which have subsequently caused Starr to suffer substantial losses.In order for Cox to be liable under common law,Starr at a minimum must prove that Cox:

Accepted Answer

A) Acted recklessly or with lack of reasonable grounds for belief. 
B) Knew of the instances of fraud. 
C) Failed to exercise due care. 
D) Was grossly negligent. 
A) Acted recklessly or with lack of reasonable grounds for belief. 
B) Knew of the instances of fraud. 
C) Failed to exercise due care. 
D) Was grossly negligent.

Question 8

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

Accepted Answer

A) Gives a client an oral report instead of a written report. 
B) Gives a client incorrect advice based on an honest error of judgment. 
C) Fails to give tax advice that saves the client money. 
D) Fails to follow generally accepted auditing standards. 
A) Gives a client an oral report instead of a written report. 
B) Gives a client incorrect advice based on an honest error of judgment. 
C) Fails to give tax advice that saves the client money. 
D) Fails to follow generally accepted auditing standards.

Question 9

The results of the Continental Vending Corporation case included the criminal prosecution of auditors for gross negligence.

Accepted Answer

A) True 
 B)False

Question 10

In which type of court case is proving "due diligence" essential to the auditors' defense?

Accepted Answer

A) Court cases brought under the Securities Exchange Act of 1934. 
B) Court cases brought by clients under common law. 
C) Court cases brought by third parties under common law. 
D) Court cases brought under the Securities Act of 1933. 
A) Court cases brought under the Securities Exchange Act of 1934. 
B) Court cases brought by clients under common law. 
C) Court cases brought by third parties under common law. 
D) Court cases brought under the Securities Act of 1933.

Question 11

The Ultramares v.Touche case held that auditors could be held liable to any foreseen third party for ordinary negligence.

Accepted Answer

A) True 
 B)False

Question 12

The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for:

Accepted Answer

A) Only criminal acts. 
B) Either ordinary or gross negligence. 
C) Only gross negligence. 
D) Only fraud. 
A) Only criminal acts. 
B) Either ordinary or gross negligence. 
C) Only gross negligence. 
D) Only fraud.

Question 13

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement.Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence?

Accepted Answer

A) A loss sustained by a client in a suit brought under common law. 
B) A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v.Touche precedent. 
C) A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933. 
D) A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law. 
A) A loss sustained by a client in a suit brought under common law. 
B) A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v.Touche precedent. 
C) A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933. 
D) A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law.

Question 14

Bran,CPA,audited Frank Corporation.The shareholders sued both Frank and Bran for securities fraud under the Federal Securities Exchange Act of 1934.The court determined that there was securities fraud and that Frank was 80% at fault and Bran was 20% at fault due to her negligence in the audit.Both Frank and Bran are solvent and the damages were determined to be $1 million.What is the maximum liability of Bran?

Accepted Answer

A) $0 
B) $200,000 
C) $500,000 
D) $1,000,000 
A) $0 
B) $200,000 
C) $500,000 
D) $1,000,000

Question 15

The Securities Exchange Act of 1934 offers recourse against the auditors to a far greater number of investors than does the Securities Act of 1933.

Accepted Answer

A) True 
 B)False

Question 16

Dexter and Co.,CPAs,issued an unqualified opinion on the 20X3 financial statements of Bart Corp.Late in 20X4,Bart determined that its treasurer had embezzled over $1,000,000.Dexter was unaware of the embezzlement.Bart has decided to sue Dexter to recover the $1,000,000.Bart's suit is based upon Dexter's failure to discover the missing money while performing the audit.Which of the following is Dexter's best defense?

Accepted Answer

A) That the audit was performed in accordance with GAAS. 
B) Dexter had no knowledge of the embezzlement. 
C) The financial statements were presented in conformity with GAAP. 
D) The treasurer was Bart's agent and as such had designed the controls which facilitated the embezzlement. 
A) That the audit was performed in accordance with GAAS. 
B) Dexter had no knowledge of the embezzlement. 
C) The financial statements were presented in conformity with GAAP. 
D) The treasurer was Bart's agent and as such had designed the controls which facilitated the embezzlement.

Question 17

A CPA firm has audited the financial statements included in a Form S-1 filed with the SEC under the Securities Act of 1933.Shortly thereafter,the company went bankrupt and a class action lawsuit was filed by the initial investors against the CPA firm.
a.What should the plaintiff investors attempt to prove?
b.Must the plaintiffs prove that they relied on the financial statements included in the Form S-1?
c.What must the CPA firm prove in order to be successful with respect to the firm's defense?

Accepted Answer

a.The plaintiff investors should attempt

Question 18

Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?

Accepted Answer

A) The CPA knew of the misstatement. 
B) The CPA was negligent. 
C) Material misstatements were contained in the financial statements. 
D) The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA. 
A) The CPA knew of the misstatement. 
B) The CPA was negligent. 
C) Material misstatements were contained in the financial statements. 
D) The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA.

Question 19

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

Accepted Answer

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

Question 20

Fraud is defined as failure to use reasonable care in the performance of services.

Accepted Answer

A) True 
 B)False

A case by a client against its CPA firm alleging negligence would be brought under:

CPAs should not be liable to any party if they perform their services with:

Which of the following forms of organization is most likely to protect the personal assets of any partner,or shareholder who has not been involved on an engagement resulting in litigation?

Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995?

If a CPA recklessly departs from the standards of due care when conducting an audit,the CPA will be liable to third parties who are unknown to the CPA based on:

Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?

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

The results of the Continental Vending Corporation case included the criminal prosecution of auditors for gross negligence.

In which type of court case is proving "due diligence" essential to the auditors' defense?

The Ultramares v.Touche case held that auditors could be held liable to any foreseen third party for ordinary negligence.

The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for:

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement.Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence?

The Securities Exchange Act of 1934 offers recourse against the auditors to a far greater number of investors than does the Securities Act of 1933.

Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?

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

Fraud is defined as failure to use reasonable care in the performance of services.

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Audit Evidence and Documentation

Audit Planning, understanding the Client, assessing Risks, and Responding

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property Plant and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

Probability-Proportion-To-Size Sampling

Filters

Exam 4: Legal Liability of CPAS

A case by a client against its CPA firm alleging negligence would be brought under:

CPAs should not be liable to any party if they perform their services with:

Which of the following forms of organization is most likely to protect the personal assets of any partner,or shareholder who has not been involved on an engagement resulting in litigation?

Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995?

If a CPA recklessly departs from the standards of due care when conducting an audit,the CPA will be liable to third parties who are unknown to the CPA based on:

Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?

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

The results of the Continental Vending Corporation case included the criminal prosecution of auditors for gross negligence.

In which type of court case is proving "due diligence" essential to the auditors' defense?

The Ultramares v.Touche case held that auditors could be held liable to any foreseen third party for ordinary negligence.

The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for:

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement.Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence?

The Securities Exchange Act of 1934 offers recourse against the auditors to a far greater number of investors than does the Securities Act of 1933.

Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?

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

Fraud is defined as failure to use reasonable care in the performance of services.

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Audit Evidence and Documentation

Audit Planning, understanding the Client, assessing Risks, and Responding

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property Plant and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

Probability-Proportion-To-Size Sampling

Filters