Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who:

Accepted Answer

A)  Unknowingly violates the 1934 Securities Exchange Act. 
B)  Knowingly or unknowingly violates the 1934 Securities Exchange Act. 
C)  Unknowingly violates the 1933 Securities Act. 
D)  Knowingly or unknowingly violates the 1933 Securities Act. 
A)  Unknowingly violates the 1934 Securities Exchange Act. 
B)  Knowingly or unknowingly violates the 1934 Securities Exchange Act. 
C)  Unknowingly violates the 1933 Securities Act. 
D)  Knowingly or unknowingly violates the 1933 Securities Act.

Question 3

Most charges made against auditors under common law are criminal.

Accepted Answer

A) True 
 B)False

Question 4

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 Restatement of Torts approach to liability, 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 5

A principle that may reduce or entirely eliminate auditor liability to a client is:

Accepted Answer

A)  Client constructive negligence. 
B)  Client contributory negligence. 
C)  Auditor ordinary negligence. 
D)  Auditor gross negligence. 
A)  Client constructive negligence. 
B)  Client contributory negligence. 
C)  Auditor ordinary negligence. 
D)  Auditor gross negligence.

Question 6

The auditors can be held liable for negligence in audits of financial statements, but not in reviews of financial statements.

Accepted Answer

A) True 
 B)False

Question 7

Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general, Jones will have to prove that:

Accepted Answer

A)  He is not guilty of gross negligence. 
B)  He performed the audit with good faith. 
C)  He performed the audit with due diligence. 
D)  The plaintiffs did not show him to be negligent. 
A)  He is not guilty of gross negligence. 
B)  He performed the audit with good faith. 
C)  He performed the audit with due diligence. 
D)  The plaintiffs did not show him to be negligent.

Question 8

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 9

Under the Ultramares rule, to which of the following parties will an accountant be liable for ordinary negligence? $$\begin{array} { | l | c | c | } 
\hline & \text { Parties in privily } & \text { Foreseen parties } \
\hline \text { A. } & \text { Yes } & \text { Yes } \
\hline \text { B. } & \text { Yes } & \text { No } \
\hline \text { C. } & \text { No } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { No } \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 10

Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. The CPA has been required to pay $50,000. The auditor's liability is most likely based upon which approach to assessing liability?

Accepted Answer

A)  Absolute liability. 
B)  Contributory negligence. 
C)  Joint and several liability. 
D)  Proportional liability. 
A)  Absolute liability. 
B)  Contributory negligence. 
C)  Joint and several liability. 
D)  Proportional liability.

Question 11

Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements?

Accepted Answer

A)  Lack of due diligence. 
B)  Lack of gross negligence. 
C)  Contributory negligence on the part of the client. 
D)  A disclaimer contained in the engagement letter. 
A)  Lack of due diligence. 
B)  Lack of gross negligence. 
C)  Contributory negligence on the part of the client. 
D)  A disclaimer contained in the engagement letter.

Question 12

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 13

The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors.

Accepted Answer

A) True 
 B)False

Question 14

Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $500,000. The auditor's liability is most likely based upon which approach to assessing liability?

Accepted Answer

A)  Absolute liability. 
B)  Contributory negligence. 
C)  Joint and several liability. 
D)  Proportional liability. 
A)  Absolute liability. 
B)  Contributory negligence. 
C)  Joint and several liability. 
D)  Proportional liability.

Question 15

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 16

In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?

Accepted Answer

A)  Rosenblum v. Adler. 
B)  Hochfelder v. Ernst. 
C)  1136 Tenants Corporation v. Rothenberg. 
D)  Continental Vending. 
A)  Rosenblum v. Adler. 
B)  Hochfelder v. Ernst. 
C)  1136 Tenants Corporation v. Rothenberg. 
D)  Continental Vending.

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

The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who:

Most charges made against auditors under common law are criminal.

A principle that may reduce or entirely eliminate auditor liability to a client is:

The auditors can be held liable for negligence in audits of financial statements, but not in reviews of financial statements.

Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general, Jones will have to prove that:

Under the Ultramares rule, to which of the following parties will an accountant be liable for ordinary negligence? Parties in privily Foreseen parties A. Yes Yes B. Yes No C. No Yes D. No No

Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements?

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:

The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors.

In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?

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

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

The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who:

Most charges made against auditors under common law are criminal.

A principle that may reduce or entirely eliminate auditor liability to a client is:

The auditors can be held liable for negligence in audits of financial statements, but not in reviews of financial statements.

Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general, Jones will have to prove that:

Under the Ultramares rule, to which of the following parties will an accountant be liable for ordinary negligence? Parties in privily Foreseen parties A. Yes Yes B. Yes No C. No Yes D. No No

Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements?

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:

The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors.

In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?

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