Question 1

Which of the following is a correct statement related to CPA legal liability under common law?

Accepted Answer

A)  CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. 
B)  CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed. 
C)  CPAs may escape all personal liability through incorporation as a limited liability corporation. 
D)  CPAs are guilty until they prove that they performed the audit with "good faith." 
A)  CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. 
B)  CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed. 
C)  CPAs may escape all personal liability through incorporation as a limited liability corporation. 
D)  CPAs are guilty until they prove that they performed the audit with "good faith." B

Question 2

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. C

Question 3

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. A

Question 4

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 5

Most of the burden of affirmative proof is on the defendant under common law.

Accepted Answer

A) True 
 B)False

Question 6

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 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

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 9

Auditors may be held liable to both their clients and third parties under common law.
a. What must a client prove to recover its losses from the auditors under common law?
b. In a court that adheres to the precedent set by the Ultramares v. Touche case, what must an ordinary third party prove to recover losses from the auditors under common law?

Accepted Answer

a. To recover losses under common law, a

Question 10

Under the Securities Act of 1933, the burden of proof that the plaintiff sustained a loss must be proven by the:

Accepted Answer

A)  Plaintiff. 
B)  Defendant. 
C)  SEC. 
D)  Jury. 
A)  Plaintiff. 
B)  Defendant. 
C)  SEC. 
D)  Jury.

Question 11

Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for:

Accepted Answer

A)  Lack of due diligence. 
B)  Existence of scienter. 
C)  Ordinary negligence. 
D)  Auditors have no liability to security purchasers under this act. 
A)  Lack of due diligence. 
B)  Existence of scienter. 
C)  Ordinary negligence. 
D)  Auditors have no liability to security purchasers under this act.

Question 12

A plaintiff may elect to bring a lawsuit against auditors under applicable statutes-including the Securities Act of 1933 and the Securities Exchange Act of 1934-and under common law. For each circumstance, indicate the most likely source of CPA liability by placing the appropriate letter in the third column.
A. The Securities Act of 1933
B. The Securities Exchange Act of 1934
C. Common Law

Accepted Answer

The answer of A plaintiff may elect to bring a...

Question 13

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the foreseeable third party approach, the auditor is generally liable to the bank which subsequently grants the loan for:

Accepted Answer

A)  Lack of due diligence. 
B)  Lack of good faith. 
C)  Gross negligence, but not ordinary negligence. 
D)  Either ordinary or gross negligence. 
A)  Lack of due diligence. 
B)  Lack of good faith. 
C)  Gross negligence, but not ordinary negligence. 
D)  Either ordinary or gross negligence.

Question 14

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.

Question 15

Section 11 of the Securities Act of 1933, and Section 10 of the Securities Exchange Act of 1934 make a CPA potentially liable to a purchaser of registered securities. For items a through f, place a checkmark (√) under the column if the plaintiff must prove its existence:

Accepted Answer

The answer of Section 11 of the Securities Act of...

Question 16

A limited liability partnership form of organization:

Accepted Answer

A)  Decreases liability of all partners of a CPA firm. 
B)  Has similar liability requirements to that of a professional corporation. 
C)  Eliminates personal liability for some, but not all, partners. 
D)  Eliminates personal liability for all partners. 
A)  Decreases liability of all partners of a CPA firm. 
B)  Has similar liability requirements to that of a professional corporation. 
C)  Eliminates personal liability for some, but not all, partners. 
D)  Eliminates personal liability for all partners.

Question 17

Which of the following court cases highlighted the need for obtaining engagement letters for professional services?

Accepted Answer

A)  Ultramares v. Touche. 
B)  Rosenblum v. Adler. 
C)  Hochfelder v. Ernst. 
D)  1136 Tenants Corporation v. Rothenberg. 
A)  Ultramares v. Touche. 
B)  Rosenblum v. Adler. 
C)  Hochfelder v. Ernst. 
D)  1136 Tenants Corporation v. Rothenberg.

Question 18

Which of the following is accurate with respect to litigation involving CPAs?

Accepted Answer

A)  A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that company. 
B)  A CPA may not successfully assert as a defense that the CPA had no motive to be part of a fraud. 
C)  A CPA may be exposed to criminal as well as civil liability. 
D)  A CPA is primarily responsible, while the client is secondarily responsible for the notes in an annual report filed with the SEC. 
A)  A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that company. 
B)  A CPA may not successfully assert as a defense that the CPA had no motive to be part of a fraud. 
C)  A CPA may be exposed to criminal as well as civil liability. 
D)  A CPA is primarily responsible, while the client is secondarily responsible for the notes in an annual report filed with the SEC.

Question 19

The precedent set by the Hochfelder v. Ernst case is generally believed to have increased auditors' legal liability.

Accepted Answer

A) True 
 B)False

Question 20

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.

Which of the following is a correct statement related to CPA legal liability under common law?

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:

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

Most of the burden of affirmative proof is on the defendant under common law.

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

Under the Securities Act of 1933, the burden of proof that the plaintiff sustained a loss must be proven by the:

Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for:

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?

Section 11 of the Securities Act of 1933, and Section 10 of the Securities Exchange Act of 1934 make a CPA potentially liable to a purchaser of registered securities. For items a through f, place a checkmark (√) under the column if the plaintiff must prove its existence:

A limited liability partnership form of organization:

Which of the following court cases highlighted the need for obtaining engagement letters for professional services?

Which of the following is accurate with respect to litigation involving CPAs?

The precedent set by the Hochfelder v. Ernst case is generally believed to have increased auditors' legal liability.

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

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Audit Evidence and Documentation

Planning the Audit; Linking Audit Procedures to Risk

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

Filters

Exam 4: Legal Liability of Cpas

Which of the following is a correct statement related to CPA legal liability under common law?

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:

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

Most of the burden of affirmative proof is on the defendant under common law.

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

Under the Securities Act of 1933, the burden of proof that the plaintiff sustained a loss must be proven by the:

Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for:

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?

Section 11 of the Securities Act of 1933, and Section 10 of the Securities Exchange Act of 1934 make a CPA potentially liable to a purchaser of registered securities. For items a through f, place a checkmark (√) under the column if the plaintiff must prove its existence:

A limited liability partnership form of organization:

Which of the following court cases highlighted the need for obtaining engagement letters for professional services?

Which of the following is accurate with respect to litigation involving CPAs?

The precedent set by the Hochfelder v. Ernst case is generally believed to have increased auditors' legal liability.

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

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Audit Evidence and Documentation

Planning the Audit; Linking Audit Procedures to Risk

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

Filters