Question 1

In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions does not extend to another partner's personal assets.

Accepted Answer

A) True 
 B)False  True

Question 2

Of the three approaches to applying the concept of foreseen users (Credit Alliance approach, restatement of torts approach, and foreseeable user approach), the approach followed by the most states is the Credit Alliance approach.

Accepted Answer

A) True 
 B)False  False

Question 3

Under common law, a foreseen user would be treated the same as:

Accepted Answer

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

Question 4

In third-party suits, which of the auditor's defenses contends lack of privity of contract?

Accepted Answer

A)  Lack of duty 
B)  Non-negligent performance 
C)  Contributory negligence 
D)  Absence of causal connections 
A)  Lack of duty 
B)  Non-negligent performance 
C)  Contributory negligence 
D)  Absence of causal connections

Question 5

Under the Securities Act of 1933, a third-party plaintiff does not have the burden of proof that he or she relied on the financial statements or that the auditor was negligent or fraudulent in doing the audit. Rather, the plaintiff need only prove that the audited financial statements contained a material misrepresentation or omission.

Accepted Answer

A) True 
 B)False

Question 6

The doctrine of joint and several liability is one factor that has contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

Accepted Answer

A) True 
 B)False

Question 7

Audit risk is the risk there will be an audit failure for a given audit engagement.

Accepted Answer

A) True 
 B)False

Question 8

The Foreign Corrupt Practices Act (FCPA) of 1977:

Accepted Answer

A)  requires auditors to review and evaluate systems of internal control as a part of an audit. 
B)  requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control. 
C)  requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA. 
D)  requires auditors to file a report with the SEC if client's internal control system is inadequate. 
A)  requires auditors to review and evaluate systems of internal control as a part of an audit. 
B)  requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control. 
C)  requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA. 
D)  requires auditors to file a report with the SEC if client's internal control system is inadequate.

Question 9

Auditors may be liable to their clients for:

Accepted Answer

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

Question 10

Which of the following statements about the Securities Act of 1933 is not true?

Accepted Answer

A)  A third-party that purchased securities described in the registration statement may sue the auditor for material misrepresentations or omissions in the audited financial statements. 
B)  A third-party user does not have the burden of proof that he/she relied on the financial statements. 
C)  A third-party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit. 
D)  A third-party user does not have the burden of proof that the loss was caused by the misleading statements. 
A)  A third-party that purchased securities described in the registration statement may sue the auditor for material misrepresentations or omissions in the audited financial statements. 
B)  A third-party user does not have the burden of proof that he/she relied on the financial statements. 
C)  A third-party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit. 
D)  A third-party user does not have the burden of proof that the loss was caused by the misleading statements.

Question 11

If the CPA negligently failed to properly prepare and file a client's tax return, the CPA may be liable for:

Accepted Answer

A)  the penalties the client owes the IRS. 
B)  the penalties and interest the client owes. 
C)  the penalties and interest the client owes, plus the tax preparation fee the CPA charged. 
D)  the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid. 
A)  the penalties the client owes the IRS. 
B)  the penalties and interest the client owes. 
C)  the penalties and interest the client owes, plus the tax preparation fee the CPA charged. 
D)  the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid.

Question 12

The Securities and Exchange Commission can impose all but which of the following sanctions?

Accepted Answer

A)  Suspend a CPA from auditing SEC clients. 
B)  Prohibit a CPA from accepting new SEC clients for a period of time. 
C)  Require a CPA to participate in continuing-education programs and make changes in their practice. 
D)  Revoke a CPA license. 
A)  Suspend a CPA from auditing SEC clients. 
B)  Prohibit a CPA from accepting new SEC clients for a period of time. 
C)  Require a CPA to participate in continuing-education programs and make changes in their practice. 
D)  Revoke a CPA license.

Question 13

Discuss at least 3 steps the AICPA and the accounting profession as a whole can and are taking to reduce the practitioner's exposure to lawsuits.

Accepted Answer

Steps the profession is taking to reduce

Question 14

Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff accountant. Elise was negligent while auditing several of the firm's clients. Under these circumstances, which of the following statements is true?

Accepted Answer

A)  Elise would have no personal liability for negligence. 
B)  Gregory & Hedrick is not liable for Elise's negligence because CPAs are generally considered to be independent contractors. 
C)  Gregory & Hedrick would not be liable for Elise's negligence if Winters disobeyed specific instructions in the performance of the audits. 
D)  Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work. 
A)  Elise would have no personal liability for negligence. 
B)  Gregory & Hedrick is not liable for Elise's negligence because CPAs are generally considered to be independent contractors. 
C)  Gregory & Hedrick would not be liable for Elise's negligence if Winters disobeyed specific instructions in the performance of the audits. 
D)  Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work.

Question 15

Tort actions against CPAs are more common than breach of contract actions because:

Accepted Answer

A)  there are more torts than contracts. 
B)  the burden of proof is on the auditor rather than on the person suing. 
C)  the person suing need prove only negligence. 
D)  the amounts recoverable are normally larger. 
A)  there are more torts than contracts. 
B)  the burden of proof is on the auditor rather than on the person suing. 
C)  the person suing need prove only negligence. 
D)  the amounts recoverable are normally larger.

Question 16

In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions does extend to the firm's assets.

Accepted Answer

A) True 
 B)False

Question 17

The King Surety Company wrote a general fidelity bond covering thefts of assets by the employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled $17,200 of company funds. When the activities were discovered, King paid Wilson the full amount in accordance with the terms of the fidelity bond, and then sought recovery against Wilson's auditors, Lynch & Merritt, CPAs. Which of the following would be Lynch & Merritt's best defense?

Accepted Answer

A)  King is not in privity of contract. 
B)  The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards. 
C)  Lynch & Merritt were not guilty either of gross negligence or fraud. 
D)  Lynch & Merritt were not aware of the King-Wilson surety relationship. 
A)  King is not in privity of contract. 
B)  The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards. 
C)  Lynch & Merritt were not guilty either of gross negligence or fraud. 
D)  Lynch & Merritt were not aware of the King-Wilson surety relationship.

Question 18

The leading precedent-setting auditing case in third-party liability is:

Accepted Answer

A)  Escott et al. v. Bar Chris Construction Corp. 
B)  Hochfelder v. Ernst & Ernst. 
C)  Ultramares Corporation v. Touche. 
D)  United States v. Simon. 
A)  Escott et al. v. Bar Chris Construction Corp. 
B)  Hochfelder v. Ernst & Ernst. 
C)  Ultramares Corporation v. Touche. 
D)  United States v. Simon.

Question 19

In the performance of an audit, a CPA:

Accepted Answer

A)  is legally liable for not detecting client fraud. 
B)  must strictly follow GAAS for privately held clients. 
C)  must strictly follow PCAOB auditing standards for publicly held clients. 
D)  must exercise due professional care in the performance of their audit responsibilities. 
A)  is legally liable for not detecting client fraud. 
B)  must strictly follow GAAS for privately held clients. 
C)  must strictly follow PCAOB auditing standards for publicly held clients. 
D)  must exercise due professional care in the performance of their audit responsibilities.

Question 20

Audit contracts (engagement letters):

Accepted Answer

A)  may be either oral or written. 
B)  must be written. 
C)  must be written and notarized. 
D)  must be written if the client is regulated by the Securities and Exchange Commission. 
A)  may be either oral or written. 
B)  must be written. 
C)  must be written and notarized. 
D)  must be written if the client is regulated by the Securities and Exchange Commission.

Exam 5: Legal Liability

In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions does not extend to another partner's personal assets.

Of the three approaches to applying the concept of foreseen users (Credit Alliance approach, restatement of torts approach, and foreseeable user approach), the approach followed by the most states is the Credit Alliance approach.

Under common law, a foreseen user would be treated the same as:

In third-party suits, which of the auditor's defenses contends lack of privity of contract?

The doctrine of joint and several liability is one factor that has contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

Audit risk is the risk there will be an audit failure for a given audit engagement.

The Foreign Corrupt Practices Act (FCPA) of 1977:

Auditors may be liable to their clients for:

Which of the following statements about the Securities Act of 1933 is not true?

If the CPA negligently failed to properly prepare and file a client's tax return, the CPA may be liable for:

The Securities and Exchange Commission can impose all but which of the following sanctions?

Discuss at least 3 steps the AICPA and the accounting profession as a whole can and are taking to reduce the practitioner's exposure to lawsuits.

Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff accountant. Elise was negligent while auditing several of the firm's clients. Under these circumstances, which of the following statements is true?

Tort actions against CPAs are more common than breach of contract actions because:

In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions does extend to the firm's assets.

The leading precedent-setting auditing case in third-party liability is:

In the performance of an audit, a CPA:

Audit contracts (engagement letters):

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Section 404 Audits of Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details and Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls and Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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