Question 1

Distinguish between "joint and several liability" and "separate and proportionate liability."

Accepted Answer

Under joint and several liability, the d

Question 2

One of the changes in auditing procedure which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using:

Accepted Answer

A)  letters of representation. 
B)  confirmation letters. 
C)  engagement letters. 
D)  billet doux letters. 
A)  letters of representation. 
B)  confirmation letters. 
C)  engagement letters. 
D)  billet doux letters.

Question 3

Which of the following most accurately describes fraud?

Accepted Answer

A)  Absence of reasonable care 
B)  Lack of slight care 
C)  Knowledge and intent to deceive 
D)  Extreme or unusual negligence without the intent to deceive 
A)  Absence of reasonable care 
B)  Lack of slight care 
C)  Knowledge and intent to deceive 
D)  Extreme or unusual negligence without the intent to deceive

Question 4

A third-party beneficiary is one which:

Accepted Answer

A)  has failed to establish legal standing before the court. 
B)  does not have privity of contract and is unknown to the contracting parties. 
C)  does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract. 
D)  may establish legal standing before the court after a contract has been consummated. 
A)  has failed to establish legal standing before the court. 
B)  does not have privity of contract and is unknown to the contracting parties. 
C)  does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract. 
D)  may establish legal standing before the court after a contract has been consummated.

Question 5

When performing an audit the CPA is required to:

Accepted Answer

A)  exercise the level of care of a reasonably prudent CPA. 
B)  strictly adhere of GAAS. 
C)  strictly be liable for detection of material misstatements in the financial statements. 
D)  avoid gross negligence in the performance of their duties. 
A)  exercise the level of care of a reasonably prudent CPA. 
B)  strictly adhere of GAAS. 
C)  strictly be liable for detection of material misstatements in the financial statements. 
D)  avoid gross negligence in the performance of their duties.

Question 6

The United States Supreme Court has ruled that outside professionals such as accountants who don't help run corrupt businesses cannot be sued under the provisions of the Foreign Corrupt Practices Act.

Accepted Answer

A) True 
 B)False

Question 7

The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called:

Accepted Answer

A)  separate and proportionate liability. 
B)  joint and several liability. 
C)  shared liability. 
D)  unitary liability. 
A)  separate and proportionate liability. 
B)  joint and several liability. 
C)  shared liability. 
D)  unitary liability.

Question 8

The restatement of torts approach to the concept of foreseen users states that any users that the auditor should have reasonably been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.

Accepted Answer

A) True 
 B)False

Question 9

Under the Securities Exchange Act of 1934, which type of organization is required to submit audited financial statements to the SEC?

Accepted Answer

A)  Every company with securities traded on national and over-the-counter exchanges. 
B)  Every corporation. 
C)  Every company issuing new securities. 
D)  Every corporation which is chartered by a state government. 
A)  Every company with securities traded on national and over-the-counter exchanges. 
B)  Every corporation. 
C)  Every company issuing new securities. 
D)  Every corporation which is chartered by a state government.

Question 10

Several states have statutes that permit privileged communication between the client and auditor, allowing a CPA to refuse to testify in state and federal courts.

Accepted Answer

A) True 
 B)False

Question 11

One result from the Escott et al. v. Bar Chris case was a greater emphasis being placed on audit staff understanding the client's business and industry.

Accepted Answer

A) True 
 B)False

Question 12

The Securities and Exchange Commission has authority to:

Accepted Answer

A)  prescribe specific auditing procedures to detect fraud concerning inventories and accounts receivable of companies engaged in interstate commerce. 
B)  deny lack of privity as a defense in third-party actions for gross negligence against the auditors of public companies. 
C)  determine accounting principles for the purpose of financial reporting by companies offering securities to the public. 
D)  require a change of auditors of governmental entities after a given period of years as a means of ensuring auditor independence. 
A)  prescribe specific auditing procedures to detect fraud concerning inventories and accounts receivable of companies engaged in interstate commerce. 
B)  deny lack of privity as a defense in third-party actions for gross negligence against the auditors of public companies. 
C)  determine accounting principles for the purpose of financial reporting by companies offering securities to the public. 
D)  require a change of auditors of governmental entities after a given period of years as a means of ensuring auditor independence.

Question 13

The Private Securities Litigation Reform Act of 1995 capped damage awards against auditors to the amount of the audit fees charged.

Accepted Answer

A) True 
 B)False

Question 14

Under the federal securities acts, one significant result occurring directly due to the Escott et al. v. Bar Chris Construction Corporation case was that SAS was changed to require:

Accepted Answer

A)  greater emphasis on subsequent events procedures. 
B)  new standards for unaudited statements. 
C)  a broader definition of third-party beneficiaries. 
D)  more companies to file annual reports with the SEC. 
A)  greater emphasis on subsequent events procedures. 
B)  new standards for unaudited statements. 
C)  a broader definition of third-party beneficiaries. 
D)  more companies to file annual reports with the SEC.

Question 15

Companies with securities traded on national and over-the-counter exchanges are required to submit audited financial statements once every three years to the Securities and Exchange Commission.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following most accurately describes constructive fraud?

Accepted Answer

A)  Absence of reasonable care 
B)  Lack of slight care 
C)  Knowledge and intent to deceive 
D)  Extreme or unusual negligence without the intent to deceive 
A)  Absence of reasonable care 
B)  Lack of slight care 
C)  Knowledge and intent to deceive 
D)  Extreme or unusual negligence without the intent to deceive

Question 17

A CPA is subject to criminal liability if the CPA:

Accepted Answer

A)  refuses to turn over requested audit documentation to a client. 
B)  performs an audit in a negligent manner. 
C)  willfully omits a material fact from a set of financial statements. 
D)  willfully breaches a contract with a client. 
A)  refuses to turn over requested audit documentation to a client. 
B)  performs an audit in a negligent manner. 
C)  willfully omits a material fact from a set of financial statements. 
D)  willfully breaches a contract with a client.

Question 18

Define ordinary negligence, gross negligence, and constructive fraud.

Accepted Answer

Ordinary negligence is the absence of re

Question 19

Which of the following auditor's defenses usually means non-reliance on the financial statements by the user?

Accepted Answer

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

Question 20

Privity of contract exists between:

Accepted Answer

A)  auditor and the federal government. 
B)  auditor and third parties. 
C)  auditor and client. 
D)  auditor and client attorney. 
A)  auditor and the federal government. 
B)  auditor and third parties. 
C)  auditor and client. 
D)  auditor and client attorney.

Exam 5: Legal Liability

Distinguish between "joint and several liability" and "separate and proportionate liability."

One of the changes in auditing procedure which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using:

Which of the following most accurately describes fraud?

A third-party beneficiary is one which:

When performing an audit the CPA is required to:

The United States Supreme Court has ruled that outside professionals such as accountants who don't help run corrupt businesses cannot be sued under the provisions of the Foreign Corrupt Practices Act.

The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called:

The restatement of torts approach to the concept of foreseen users states that any users that the auditor should have reasonably been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.

Under the Securities Exchange Act of 1934, which type of organization is required to submit audited financial statements to the SEC?

Several states have statutes that permit privileged communication between the client and auditor, allowing a CPA to refuse to testify in state and federal courts.

One result from the Escott et al. v. Bar Chris case was a greater emphasis being placed on audit staff understanding the client's business and industry.

The Securities and Exchange Commission has authority to:

The Private Securities Litigation Reform Act of 1995 capped damage awards against auditors to the amount of the audit fees charged.

Under the federal securities acts, one significant result occurring directly due to the Escott et al. v. Bar Chris Construction Corporation case was that SAS was changed to require:

Companies with securities traded on national and over-the-counter exchanges are required to submit audited financial statements once every three years to the Securities and Exchange Commission.

Which of the following most accurately describes constructive fraud?

A CPA is subject to criminal liability if the CPA:

Define ordinary negligence, gross negligence, and constructive fraud.

Which of the following auditor's defenses usually means non-reliance on the financial statements by the user?

Privity of contract exists between:

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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