Exam 20: Legal Liability

Why are plaintiffs motivated to bring actions under RICO?

Common law

One of the greatest sources of liability for auditors under the 1934 Act is Section 10(b)and the related Rule 10b-5 which states that it is unlawful for any person to defraud,make any untrue statement of a material fact,or engage in any act in connection with the purchase or sale of a security.Once a plaintiff has established that he or she can sue under Rule 10b-5,there are four elements that must be proven.List the four elements.

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

Section 11 under the Securities Act of 1933 treats claims against auditors more favorably than common law.What two things does a plaintiff need to prove to have a case against the auditor of a company in which she purchased new investments? What does the auditor have to do to have the case dismissed?

Briefly describe the Sarbanes-Oxley Act of 2002.Be sure to mention (1)who passed the act,(2)its primary objectives,(3)major aspects of the act,(4)the parties that it affects,and (5)its relationship to the SEC rules.

An auditor can be sued by a third party under statutory law for willful violation of federal statutes.

The most restrictive view under common law is that auditors have no liability to third parties who do not have a privity relationship with the auditor.Briefly define privity and the effect it has on the auditor,client,investors,and creditors under common law.

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?

A CPA who fraudulently performs an audit of a corporation's financial statements will

To recover against an auditor in a negligence case,the client must prove that the client sustained an actual loss or damage.

What is the primary reason that Congress passed the Securities Litigation Uniform Standards Act of 1998?

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.

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

The Securities Exchange Act of 1934

The Sarbanes-Oxley Act of 2002 is considered the most sweeping securities law since the 1933 and 1934 Acts.Which item in the list below was not part of the Sarbanes-Oxley Act of 2002?

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

West & Company,CPAs,was engaged by Sand Corporation to audit its financial statements.West issued an unqualified opinion on Sand's financial statements.Sand has been accused of making negligent misrepresentations in the financial statements that Reed relied upon when purchasing Sand's stock.West was not aware of the misrepresentations and was not negligent in performing the audit.If Reed sues West for damages based on Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934,West will

An audit client loses a lawsuit and the judgment is for an amount in excess of the contingent liability the client had recorded in the audited financial statements.The auditor,using the typical degree of due care as other members of the profession,determined that the amount of contingent liability recorded by the client in the financial statements for the pending lawsuit was reasonable,given the facts at the time of the audit.This judgment by the auditor is likely to result in