Question 1

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

Accepted Answer

A)  negligence. 
B)  fraud. 
C)  an error in judgment. 
D)  constructive negligence. 
A)  negligence. 
B)  fraud. 
C)  an error in judgment. 
D)  constructive negligence.

Question 2

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 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 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 3

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

Accepted Answer

A)  if there is contributory negligence on the part of the purchaser. 
B)  if the CPA can prove due diligence. 
C)  unless the purchaser can prove privity with the CPA. 
D)  unless the purchaser can prove scienter on the part of the CPA. 
A)  if there is contributory negligence on the part of the purchaser. 
B)  if the CPA can prove due diligence. 
C)  unless the purchaser can prove privity with the CPA. 
D)  unless the purchaser can prove scienter on the part of the CPA.

Question 4

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

Accepted Answer

A)  sanctions by the PCAOB levied against the individual auditor as well as the accounting firm. 
B)  a successful lawsuit claiming auditor negligence. 
C)  a successful lawsuit claiming breach of contract. 
D)  no legal action whatsoever since due care was exercised. 
A)  sanctions by the PCAOB levied against the individual auditor as well as the accounting firm. 
B)  a successful lawsuit claiming auditor negligence. 
C)  a successful lawsuit claiming breach of contract. 
D)  no legal action whatsoever since due care was exercised.

Question 5

Under Section 11 of the Securities Act of 1933,which of the following standards may a CPA use as a defense?

Accepted Answer

A)  Generally accepted auditing standards and generally accepted fraud detection standards. 
B)  Generally accepted auditing standards but not generally accepted fraud detection standards. 
C)  Generally accepted fraud detection standards but not generally accepted auditing standards. 
D)  Neither generally accepted auditing standards nor generally accepted fraud detection standards. 
A)  Generally accepted auditing standards and generally accepted fraud detection standards. 
B)  Generally accepted auditing standards but not generally accepted fraud detection standards. 
C)  Generally accepted fraud detection standards but not generally accepted auditing standards. 
D)  Neither generally accepted auditing standards nor generally accepted fraud detection standards.

Question 6

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?

Accepted Answer

The plaintiff need only prove that (1)a

Question 7

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

Accepted Answer

A)  Discovery of fraud subsequent to issuance of the audit report. 
B)  Users of financial statements incur losses. 
C)  The legal process commencing with the filing of a lawsuit. 
D)  Final resolution of the dispute. 
A)  Discovery of fraud subsequent to issuance of the audit report. 
B)  Users of financial statements incur losses. 
C)  The legal process commencing with the filing of a lawsuit. 
D)  Final resolution of the dispute.

Question 8

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.

Accepted Answer

1.A material,factual misrepresentation o

Question 9

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

Accepted Answer

A)  lose, because the statements contained negligent misrepresentations. 
B)  lose, because Reed relied upon the financial statements. 
C)  prevail, because some element of scienter must be proved. 
D)  prevail, because Reed was not in privity of contract with West. 
A)  lose, because the statements contained negligent misrepresentations. 
B)  lose, because Reed relied upon the financial statements. 
C)  prevail, because some element of scienter must be proved. 
D)  prevail, because Reed was not in privity of contract with West.

Question 10

Quincy bought Teal Corp.common stock in an offering registered under the Securities Act of 1933.Worth & Co.,CPAs,gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC.Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement.Quincy must prove that

Accepted Answer

A)  there was fraudulent activity by Worth. 
B)  there was a material misstatement in the financial statements. 
C)  quincy relied on Worth's opinion. 
D)  quincy was in privity with Worth. 
A)  there was fraudulent activity by Worth. 
B)  there was a material misstatement in the financial statements. 
C)  quincy relied on Worth's opinion. 
D)  quincy was in privity with Worth.

Question 11

What type of liability has the Private Securities Litigation Reform Act of 1995 created for cases filed under federal statutory law? How did this change from previous legislation? How has this impacted the cases against auditors and the way cases are now presented?

Accepted Answer

Prior to the passage of the 1995 Act,aud

Question 12

When performing an audit,a CPA will most likely be considered negligent when the CPA fails to

Accepted Answer

A)  detect all of a client's fraudulent activities. 
B)  include a negligence disclaimer in the client engagement letter. 
C)  warn a client of known internal control weaknesses. 
D)  warn a client's customers of embezzlement by the client's employees. 
A)  detect all of a client's fraudulent activities. 
B)  include a negligence disclaimer in the client engagement letter. 
C)  warn a client of known internal control weaknesses. 
D)  warn a client's customers of embezzlement by the client's employees.

Question 13

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,which of the following must be proven by a purchaser of the security?

Accepted Answer

A)  The CPA committed fraud and the purchaser relied on the financial statements. 
B)  The purchaser relied on the financial statements, but not that the CPA committed fraud. 
C)  The CPA committed fraud, but not that the purchaser relied on the financial statements. 
D)  Neither that the CPA committed fraud, nor that the purchaser relied on the financial statements. 
A)  The CPA committed fraud and the purchaser relied on the financial statements. 
B)  The purchaser relied on the financial statements, but not that the CPA committed fraud. 
C)  The CPA committed fraud, but not that the purchaser relied on the financial statements. 
D)  Neither that the CPA committed fraud, nor that the purchaser relied on the financial statements.

Question 14

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

Accepted Answer

A)  probably be liable to any person who suffered a loss as a result of the fraud. 
B)  be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements. 
C)  probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements. 
D)  be liable only to third parties in privity of contract with the CPA. 
A)  probably be liable to any person who suffered a loss as a result of the fraud. 
B)  be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements. 
C)  probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements. 
D)  be liable only to third parties in privity of contract with the CPA.

Question 15

Gold,CPA,rendered an unqualified opinion on the financial statements of Eastern Power Company.Egan purchased Eastern bonds in a public offering subject to the Securities Act of 1933.The registration statement filed with the SEC included the audited financial statements.Gold is being sued by Egan under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements.To prevail,Egan must prove

Accepted Answer

A)  neither scienter nor reliance. 
B)  reliance but not scienter. 
C)  scienter but not reliance. 
D)  both scienter and reliance. 
A)  neither scienter nor reliance. 
B)  reliance but not scienter. 
C)  scienter but not reliance. 
D)  both scienter and reliance.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is not within the class of foreseen users of an accountant's work product?

Accepted Answer

A)  A prospective shareholder of the client. 
B)  A lender bank when the accountant knows only that the client will use the financial statements to obtain a loan from an unspecified source. 
C)  A bank when the accountant knows the client will rely on the financial statements as the basis for a loan from the bank. 
D)  An investor if the accountant knows that the client is seeking capital from a select group of investors. 
A)  A prospective shareholder of the client. 
B)  A lender bank when the accountant knows only that the client will use the financial statements to obtain a loan from an unspecified source. 
C)  A bank when the accountant knows the client will rely on the financial statements as the basis for a loan from the bank. 
D)  An investor if the accountant knows that the client is seeking capital from a select group of investors.

Question 18

To prevail in a suit alleging negligence,a third party must prove that the auditor had a duty to the auditor's client to exercise due care.

Accepted Answer

A) True 
 B)False

Question 19

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?

Accepted Answer

A)  The Securities Exchange Act of 1934, the Securities Act of 1933, and the Sarbanes-Oxley Act of 2002 provide equal likelihoods of prevailing. 
B)  The Securities Exchange Act of 1934. 
C)  The Securities Act of 1933. 
D)  The Sarbanes-Oxley Act of 2002. 
A)  The Securities Exchange Act of 1934, the Securities Act of 1933, and the Sarbanes-Oxley Act of 2002 provide equal likelihoods of prevailing. 
B)  The Securities Exchange Act of 1934. 
C)  The Securities Act of 1933. 
D)  The Sarbanes-Oxley Act of 2002.

Question 20

In a common law action against an accountant in a state following the Ultramares doctrine,lack of privity is a viable defense if the plaintiff

Accepted Answer

A)  can prove the presence of gross negligence which amounts to a reckless disregard for the truth. 
B)  bases the action upon fraud. 
C)  is the client's creditor who sues the accountant for negligence. 
D)  is the accountant's client. 
A)  can prove the presence of gross negligence which amounts to a reckless disregard for the truth. 
B)  bases the action upon fraud. 
C)  is the client's creditor who sues the accountant for negligence. 
D)  is the accountant's client.

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

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

Under Section 11 of the Securities Act of 1933,which of the following standards may a CPA use as a defense?

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

What type of liability has the Private Securities Litigation Reform Act of 1995 created for cases filed under federal statutory law? How did this change from previous legislation? How has this impacted the cases against auditors and the way cases are now presented?

When performing an audit,a CPA will most likely be considered negligent when the CPA fails to

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

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

Which of the following is not within the class of foreseen users of an accountant's work product?

To prevail in a suit alleging negligence,a third party must prove that the auditor had a duty to the auditor's client to exercise due care.

In a common law action against an accountant in a state following the Ultramares doctrine,lack of privity is a viable defense if the plaintiff

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professsional Conduct,Independence,and Quality Control

Assurance,Attestation,amd Internal Auditing Services-professional Judgement Module

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Exam 20: Legal Liability

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

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

Under Section 11 of the Securities Act of 1933,which of the following standards may a CPA use as a defense?

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

What type of liability has the Private Securities Litigation Reform Act of 1995 created for cases filed under federal statutory law? How did this change from previous legislation? How has this impacted the cases against auditors and the way cases are now presented?

When performing an audit,a CPA will most likely be considered negligent when the CPA fails to

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

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

Which of the following is not within the class of foreseen users of an accountant's work product?

To prevail in a suit alleging negligence,a third party must prove that the auditor had a duty to the auditor's client to exercise due care.

In a common law action against an accountant in a state following the Ultramares doctrine,lack of privity is a viable defense if the plaintiff

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professsional Conduct,Independence,and Quality Control

Assurance,Attestation,amd Internal Auditing Services-professional Judgement Module

Filters