Question 1

Distinguish between what is meant by business failure and audit failure.

Accepted Answer

Business failure occurs when a business

Question 2

In which case were auditors prosecuted for filing false financial statements for a client with the government?

Accepted Answer

A)  1136 Tenants case 
B)  United States v. Simon case 
C)  Escott et al. v. Bar Chris case, aka Bar Chris 
D)  Ultramares Corporation v. Touche case 
A)  1136 Tenants case 
B)  United States v. Simon case 
C)  Escott et al. v. Bar Chris case, aka Bar Chris 
D)  Ultramares Corporation v. Touche case

Question 3

Audit fraud occurs when:

Accepted Answer

A)  a misstatement is made and there is both knowledge of its falsity and the intent to deceive. 
B)  a misstatement is made and there is knowledge of its falsity but no intent to deceive. 
C)  the auditor lacks even slight care in the performance in performing the audit. 
D)  the auditor has an absence of reasonable care in the performance of the audit. 
A)  a misstatement is made and there is both knowledge of its falsity and the intent to deceive. 
B)  a misstatement is made and there is knowledge of its falsity but no intent to deceive. 
C)  the auditor lacks even slight care in the performance in performing the audit. 
D)  the auditor has an absence of reasonable care in the performance of the audit.

Question 4

Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users. This description is the legal term for:

Accepted Answer

A)  ordinary negligence. 
B)  gross negligence. 
C)  constructive fraud. 
D)  fraud. 
A)  ordinary negligence. 
B)  gross negligence. 
C)  constructive fraud. 
D)  fraud.

Question 5

The preferred defense in third-party suits is:

Accepted Answer

A)  lack of duty to perform. 
B)  non-negligent performance. 
C)  absence of causal connection. 
D)  client fraud. 
A)  lack of duty to perform. 
B)  non-negligent performance. 
C)  absence of causal connection. 
D)  client fraud.

Question 6

Auditors who fail to exercise due care in their performance of professional services may be liable for:

Accepted Answer

A)  punitive liability. 
B)  breach of contract. 
C)  excess liability. 
D)  criminal charges. 
A)  punitive liability. 
B)  breach of contract. 
C)  excess liability. 
D)  criminal charges.

Question 7

Matthews & Co., CPAs, issued an unqualified opinion on Dodgers Corporation. Millennium Bank, which relied on the audited financial statements, granted a loan of $200,00,000 to Dodgers Corporation. Dodgers subsequently defaulted on the loan. To succeed in an action against Matthews & Co., Millennium Bank must prove that the bank was:

Accepted Answer

A)  in privity of contract with Dodgers. 
B)  in privity of contract with Millennium. 
C)  free from contributory negligence. 
D)  justified in relying on the financial statements in granting the loan. 
A)  in privity of contract with Dodgers. 
B)  in privity of contract with Millennium. 
C)  free from contributory negligence. 
D)  justified in relying on the financial statements in granting the loan.

Question 8

Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units.

Accepted Answer

A) True 
 B)False

Question 9

The preferred defense in third-party suits is absence of causal connection.

Accepted Answer

A) True 
 B)False

Question 10

An individual who is not party to the contract between a CPA and the client, but who is known by both and is intended to receive certain benefits from the contract is known as:

Accepted Answer

A)  a third party. 
B)  a common law inheritor. 
C)  a tort. 
D)  a third-party beneficiary. 
A)  a third party. 
B)  a common law inheritor. 
C)  a tort. 
D)  a third-party beneficiary.

Question 11

Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to as:

Accepted Answer

A)  the antifraud provisions. 
B)  the new issues provisions. 
C)  the full-employment act for accountants. 
D)  the RICO provisions. 
A)  the antifraud provisions. 
B)  the new issues provisions. 
C)  the full-employment act for accountants. 
D)  the RICO provisions.

Question 12

Which of the following is an illustration of liability under the federal securities acts?

Accepted Answer

A)  Client sues auditor for not discovering a theft of assets by an employee. 
B)  Bank sues auditor for not discovering that borrower's financial statements are misstated. 
C)  Combined group of stockholders sue auditor for not discovering materially misstated financial statements. 
D)  auditor sues client for not cooperating during engagement. 
A)  Client sues auditor for not discovering a theft of assets by an employee. 
B)  Bank sues auditor for not discovering that borrower's financial statements are misstated. 
C)  Combined group of stockholders sue auditor for not discovering materially misstated financial statements. 
D)  auditor sues client for not cooperating during engagement.

Question 13

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Accepted Answer

A) True 
 B)False

Question 14

CPAs can be held liable for criminal activity under both state and federal laws. Infamous cases have involved United States vs. Natelli and ESM Government Securities v. Alexander Grant and Co. Discuss what occurred and prepare a summary of the court findings.

Accepted Answer

Natelli-two auditors were convicted of c

Question 15

Gross negligence is the existence of extreme or unusual negligence with the intent to deceive.

Accepted Answer

A) True 
 B)False

Question 16

To succeed in an action against the auditor, the client must be able to show that:

Accepted Answer

A)  the auditor was fraudulent. 
B)  the auditor was grossly negligent. 
C)  there was a written contract. 
D)  there is a close causal connection between the auditor's behavior and the damages suffered by the client. 
A)  the auditor was fraudulent. 
B)  the auditor was grossly negligent. 
C)  there was a written contract. 
D)  there is a close causal connection between the auditor's behavior and the damages suffered by the client.

Question 17

A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract. This is known as the concept of:

Accepted Answer

A)  foreseen users. 
B)  foreseeable users. 
C)  expected users. 
D)  four-party contracts. 
A)  foreseen users. 
B)  foreseeable users. 
C)  expected users. 
D)  four-party contracts.

Question 18

The same three defenses available to auditors in common lawsuits by third parties-non-negligent performance, lack of duty, and absence of causal connection-are also available for suits under the Securities Exchange Act of 1934.

Accepted Answer

A) True 
 B)False

Question 19

Under the Securities Exchange Act of 1934, most of the litigation against the auditor has been generated because of the auditor's involvement with the:

Accepted Answer

A)  8-K form. 
B)  10-K form. 
C)  10-Q form. 
D)  S-1 form. 
A)  8-K form. 
B)  10-K form. 
C)  10-Q form. 
D)  S-1 form.

Question 20

Which of the following statements is true?

Accepted Answer

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

Exam 5: Legal Liability

Distinguish between what is meant by business failure and audit failure.

In which case were auditors prosecuted for filing false financial statements for a client with the government?

Audit fraud occurs when:

Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users. This description is the legal term for:

The preferred defense in third-party suits is:

Auditors who fail to exercise due care in their performance of professional services may be liable for:

Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units.

The preferred defense in third-party suits is absence of causal connection.

An individual who is not party to the contract between a CPA and the client, but who is known by both and is intended to receive certain benefits from the contract is known as:

Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to as:

Which of the following is an illustration of liability under the federal securities acts?

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

CPAs can be held liable for criminal activity under both state and federal laws. Infamous cases have involved United States vs. Natelli and ESM Government Securities v. Alexander Grant and Co. Discuss what occurred and prepare a summary of the court findings.

Gross negligence is the existence of extreme or unusual negligence with the intent to deceive.

To succeed in an action against the auditor, the client must be able to show that:

A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract. This is known as the concept of:

The same three defenses available to auditors in common lawsuits by third parties-non-negligent performance, lack of duty, and absence of causal connection-are also available for suits under the Securities Exchange Act of 1934.

Under the Securities Exchange Act of 1934, most of the litigation against the auditor has been generated because of the auditor's involvement with the:

Which of the following statements is true?

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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