Question 1

What is a primary beneficiary?

Accepted Answer

A primary beneficiary is a third party for whose primary benefit the audit or other accounting service s performed. Many cases indicate that proof of ordinary negligence may be sufficient to make accountants liable for damages to primary beneficiaries.

Question 2

Beckler & Associates CPAs issued an unqualified opinion on the financial statements of Queen Ltd. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover the losses associated with Queen's default. Which of the following must Mac prove in order to recover? I. Beckler was negligent in conducting the audit.
II) Mac relied on the financial statements.

Accepted Answer

A)  I only. 
B)  II only. 
C)  Both I and II. 
D)  Neither I nor II. 
A)  I only. 
B)  II only. 
C)  Both I and II. 
D)  Neither I nor II. C

Question 3

While conducting an audit, Larson & Larson Chartered Professional Accountants failed to detect a material misstatement in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a 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. Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities?

Accepted Answer

A)  The purchaser must prove that Larson was negligent in conducting the audit. 
B)  The purchaser must prove that Larson knew of the material misstatements. 
C)  Larson will not be liable if they had reasonable grounds to believe the financial statements were accurate. 
D)  Larson will be liable unless the purchaser did not rely on the financial statements. 
A)  The purchaser must prove that Larson was negligent in conducting the audit. 
B)  The purchaser must prove that Larson knew of the material misstatements. 
C)  Larson will not be liable if they had reasonable grounds to believe the financial statements were accurate. 
D)  Larson will be liable unless the purchaser did not rely on the financial statements. C

Question 4

While conducting an audit, Larson Associates CPAs failed to detect a material misstatement 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 defence would be that the ________.

Accepted Answer

A)  audit was conducted in accordance with generally accepted auditing standards 
B)  client was aware of the misstatements 
C)  purchaser was not in privity of contract with Larson 
D)  identity of the purchaser was not known to Larson at the time of the audit 
A)  audit was conducted in accordance with generally accepted auditing standards 
B)  client was aware of the misstatements 
C)  purchaser was not in privity of contract with Larson 
D)  identity of the purchaser was not known to Larson at the time of the audit

Question 5

Auditors are increasingly obligated to report illegal acts to third parties outside the company in which they occurred.

Accepted Answer

A) True 
 B)False

Question 6

Accountants are liable under the common law for breach of contract if they fail to fulfill their contractual obligations with their clients and for negligence if they fail to exercise due care in the performance of services for their clients

Accepted Answer

A) True 
 B)False

Question 7

Constructive fraud is characterized by an intentional act designed to deceive, mislead or injure the rights of another person.

Accepted Answer

A) True 
 B)False

Question 8

To protect themselves, before an engagement letter is submitted to a client, what should an auditor complete to assist in deciding whether to accept a particular client for an engagement?

Accepted Answer

A)  Management letter. 
B)  Client acceptance checklist. 
C)  Reliance letter. 
D)  Limited liability letter. 
A)  Management letter. 
B)  Client acceptance checklist. 
C)  Reliance letter. 
D)  Limited liability letter.

Question 9

Due professional care implies that the practitioner is conducting his or her work to the highest possible standard and will make no errors.

Accepted Answer

A) True 
 B)False

Question 10

Under the common law, in a lawsuit concerning auditor liability, the primary beneficiary is _______.

Accepted Answer

A)  the recipient of funds when someone dies 
B)  a party for whose benefit the audit or service is being performed 
C)  the client 
D)  the shareholders of the company 
A)  the recipient of funds when someone dies 
B)  a party for whose benefit the audit or service is being performed 
C)  the client 
D)  the shareholders of the company

Question 11

Foreseeable third parties are best described as ________.

Accepted Answer

A)  management of the company 
B)  those that have direct involvement through a contract 
C)  those third parties who will rely on the audit and are specifically known by the auditor 
D)  those third parties who potentially will rely on the audit but are not specifically known by the auditor 
A)  management of the company 
B)  those that have direct involvement through a contract 
C)  those third parties who will rely on the audit and are specifically known by the auditor 
D)  those third parties who potentially will rely on the audit but are not specifically known by the auditor

Question 12

In the London v.General Bank (1895) case, it was held that the auditor takes complete responsibility for detecting fraud in a set of financial statements they are auditing.

Accepted Answer

A) True 
 B)False

Question 13

Some people argue that there is a legal liability crisis for auditors in Canada. Do you agree or disagree? Provide some evidence supporting this argument, and some evidence contradicting this argument.

Accepted Answer

Auditors are increasingly being held to

Question 14

A CPA may be liable to any purchaser of a security if the CPA issued a clean opinion on materially misstated financial statements. The CPA usually will not be liable to the purchaser ________.

Accepted Answer

A)  if the purchaser is guilty of contributory negligence 
B)  if the CPA can prove due care in the audit 
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 the purchaser is guilty of contributory negligence 
B)  if the CPA can prove due care in the audit 
C)  unless the purchaser can prove privity with the CPA 
D)  unless the purchaser can prove scienter on the part of the CPA

Question 15

Sleek Corporation is a public corporation whose stock is traded on several provincial securities exchanges. Sleek engaged Garson & Garson CPAs to audit Sleek's financial statements. Sleek was planning a business expansion program and needed the audit in order to obtain financing through borrowing and making a public stock offering.
Before the engagement began, Fred Hedge, the president of Sleek, told Garson's managing partner that the audited financial statements would be submitted to Sleek's banks to obtain the necessary loans. During the course of the audit, Garson's managing partner found that Hedge and other Sleek officers had embezzled substantial amounts of money from the corporation. These embezzlements threatened Sleek's financial stability.
When these findings were brought to Hedge's attention, Hedge promised that the money would be repaid and begged that the auditor not disclose the fraud. Hedge also told Garson's managing partner that several friends and relatives of Sleek's officers had been advised about the projected business expansion and proposed stock offering, and had purchased significant amounts of Sleek's stock based on this information.
Garson submitted an unqualified opinion on Sleek's financial statements, which did not include adjustments for or disclosures about the embezzlements and insider stock transactions. The financial statements and audit report were submitted to Sleek's regular banks including Knox Bank. Knox, relying on the financial statements and Garson's report, gave Sleek a $2,000,000 loan. Sleek's audited financial statements were also incorporated into a prospectus. The prospectus filed by Sleek with the OSC offered 100,000 shares of its common stock at $100 per share. An OSC investigation of Sleek disclosed the embezzlements and the insider trading. Trading in Sleek's stock was suspended and Sleek defaulted on the Knox loan. As a result, the following legal actions were taken:
1. Knox sued Garson.
2. The general public purchasers of Sleek's stock offering sued Garson.
Required:
A. Knox would recover from Garson for fraud. The elements of fraud are:
a. the misrepresentation of a material fact Garson issued an unqualified opinion on misleading financial statements. Garson's opinion did not include adjustments for or disclosures about the embezzlements and insider stock trading.
b. a loss was sustained
c. by Knox as a direct result of Sleek's default on the loan.
A. Would Knox recover from Garson for fraud?
B. The general public purchasers of Sleek's stock offerings would recover from Garson for the same reasons.
a. Under the facts presented, Garson could not establish a due diligence defence because they knew that the prospectus failed to disclose material facts. Garson's knowledge that the prospectus failed to disclose a material fact, such as the insider trading and the embezzlements, is considered a fraudulent action. The omission was material.
b. Garson's action was intentional or, at a minimum, a result of gross negligence or recklessness (scienter).
c. These purchasers relied on Garson's opinion on the financial statements and incurred a loss.
B. Would the general public purchasers of Sleek's stock offerings recover from Garson?

Accepted Answer

A. Knox would recover from Garson for fr

Question 16

Which of the following is NOT an element of a successful negligence action against auditors?

Accepted Answer

A)  There must be proof that damage resulted. 
B)  The plaintiff must be a known user of the financial statements. 
C)  There must be a legal duty of care to the plaintiff. 
D)  There must be a reasonable connection between the breach of duty of care and resulting losses. 
A)  There must be proof that damage resulted. 
B)  The plaintiff must be a known user of the financial statements. 
C)  There must be a legal duty of care to the plaintiff. 
D)  There must be a reasonable connection between the breach of duty of care and resulting losses.

Question 17

The Securities and Exchange Commission in the United States will hold a negligent auditor liable under common law.

Accepted Answer

A) True 
 B)False

Question 18

Joint and several liability is a doctrine that allows a successful plaintiff to recover the full amount of damage award from the defendants who have money or insurance.

Accepted Answer

A) True 
 B)False

Question 19

A company whose partners' liability is limited to the capital they have invested in the business is known as a ________.

Accepted Answer

A)  partnership 
B)  corporation 
C)  proprietorship 
D)  limited liability partnership 
A)  partnership 
B)  corporation 
C)  proprietorship 
D)  limited liability partnership

Question 20

In a common law action against an accountant, all that a plaintiff must prove is that the accountant was negligent, grossly negligent, fraudulent, or otherwise responsible for the damages claimed.

Accepted Answer

A) True 
 B)False

What is a primary beneficiary?

Auditors are increasingly obligated to report illegal acts to third parties outside the company in which they occurred.

Accountants are liable under the common law for breach of contract if they fail to fulfill their contractual obligations with their clients and for negligence if they fail to exercise due care in the performance of services for their clients

Constructive fraud is characterized by an intentional act designed to deceive, mislead or injure the rights of another person.

To protect themselves, before an engagement letter is submitted to a client, what should an auditor complete to assist in deciding whether to accept a particular client for an engagement?

Due professional care implies that the practitioner is conducting his or her work to the highest possible standard and will make no errors.

Under the common law, in a lawsuit concerning auditor liability, the primary beneficiary is _______.

Foreseeable third parties are best described as ________.

In the London v.General Bank (1895) case, it was held that the auditor takes complete responsibility for detecting fraud in a set of financial statements they are auditing.

Some people argue that there is a legal liability crisis for auditors in Canada. Do you agree or disagree? Provide some evidence supporting this argument, and some evidence contradicting this argument.

A CPA may be liable to any purchaser of a security if the CPA issued a clean opinion on materially misstated financial statements. The CPA usually will not be liable to the purchaser ________.

Which of the following is NOT an element of a successful negligence action against auditors?

The Securities and Exchange Commission in the United States will hold a negligent auditor liable under common law.

Joint and several liability is a doctrine that allows a successful plaintiff to recover the full amount of damage award from the defendants who have money or insurance.

A company whose partners' liability is limited to the capital they have invested in the business is known as a ________.

In a common law action against an accountant, all that a plaintiff must prove is that the accountant was negligent, grossly negligent, fraudulent, or otherwise responsible for the damages claimed.

Introduction to Auditing

Auditors Professional Roles and Responsibilities

Auditors Ethical and Legal Responsibilities

Reports on Audited Financial Statements

Preliminary Audit Planning: Understanding the Auditees Business

Assessing Risks in an Audit Engagement

Internal Control Over Financial Reporting

Audit Evidence and Assurance

Control Assessment and Testing

Audit Sampling

The Revenues, Receivables, and Receipts Process and Cash Account Balance

The Purchases, Payables, and Payments Process

Payroll and Production Processes

The Finance and Investment Process

Completing the Audit Work

Applying Professional Judgment to Form the Audit Opinion and Issue Theaudit Report

Other Public Accounting Services and Reportsreviews and Compilations

Professional Rules of Conduct Details and Auditor Responsibilities

Part I the Audit of Accounting Estimates: Basic Material Relating to Accountingestimates

Other Professional Accounting Services and Reports, Including Fraud

Filters

Exam 20: Legal Liability Cases

What is a primary beneficiary?

Auditors are increasingly obligated to report illegal acts to third parties outside the company in which they occurred.

Accountants are liable under the common law for breach of contract if they fail to fulfill their contractual obligations with their clients and for negligence if they fail to exercise due care in the performance of services for their clients

Constructive fraud is characterized by an intentional act designed to deceive, mislead or injure the rights of another person.

To protect themselves, before an engagement letter is submitted to a client, what should an auditor complete to assist in deciding whether to accept a particular client for an engagement?

Due professional care implies that the practitioner is conducting his or her work to the highest possible standard and will make no errors.

Under the common law, in a lawsuit concerning auditor liability, the primary beneficiary is _______.

Foreseeable third parties are best described as ________.

In the London v.General Bank (1895) case, it was held that the auditor takes complete responsibility for detecting fraud in a set of financial statements they are auditing.

Some people argue that there is a legal liability crisis for auditors in Canada. Do you agree or disagree? Provide some evidence supporting this argument, and some evidence contradicting this argument.

A CPA may be liable to any purchaser of a security if the CPA issued a clean opinion on materially misstated financial statements. The CPA usually will not be liable to the purchaser ________.

Which of the following is NOT an element of a successful negligence action against auditors?

The Securities and Exchange Commission in the United States will hold a negligent auditor liable under common law.

Joint and several liability is a doctrine that allows a successful plaintiff to recover the full amount of damage award from the defendants who have money or insurance.

A company whose partners' liability is limited to the capital they have invested in the business is known as a ________.

In a common law action against an accountant, all that a plaintiff must prove is that the accountant was negligent, grossly negligent, fraudulent, or otherwise responsible for the damages claimed.

Introduction to Auditing

Auditors Professional Roles and Responsibilities

Auditors Ethical and Legal Responsibilities

Reports on Audited Financial Statements

Preliminary Audit Planning: Understanding the Auditees Business

Assessing Risks in an Audit Engagement

Internal Control Over Financial Reporting

Audit Evidence and Assurance

Control Assessment and Testing

Audit Sampling

The Revenues, Receivables, and Receipts Process and Cash Account Balance

The Purchases, Payables, and Payments Process

Payroll and Production Processes

The Finance and Investment Process

Completing the Audit Work

Applying Professional Judgment to Form the Audit Opinion and Issue Theaudit Report

Other Public Accounting Services and Reportsreviews and Compilations

Professional Rules of Conduct Details and Auditor Responsibilities

Part I the Audit of Accounting Estimates: Basic Material Relating to Accountingestimates

Other Professional Accounting Services and Reports, Including Fraud

Filters