Exam 5: Legal Liability

Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely. This would not include:

Which of the auditor's defenses is ordinarily not available when lawsuits are filed by a third party?

In connection with the audit of financial statements, an independent auditor could be responsible for failure to detect a material fraud if:

"Absence of reasonable care that can be expected of a person in a set of circumstances" defines:

The increased litigation under the federal securities laws has resulted from:

The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the:

The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called:

Under common law, an individual or company that (1) does not have a contract with an auditor, (2) is known by the auditor in advance of the audit, and (3) will use the auditor's report to make decisions about the client company has:

The partnership of Booth & Haynes, CPAs, has been engaged to examine the financial statements of Paul, Inc., in connection with the registration of Paul's securities with the Securities and Exchange Commission. Under these circumstances, which of the following statements is true?

While the Foreign Corrupt Practices Act of 1977 remains in effect, its internal control provisions have been largely superseded by which of the following?

A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated. This is an example of which of the following legal liability concepts?

Three approaches to the application of the foreseen users' concept are (1) the Credit Alliance approach, (2) the restatement of torts approach, and (3) the foreseeable user approach. Summarize each of these three approaches.

Match eight of the following terms (a-n) with the definitions provided below (1-8): a. Foreign Corrupt Practices Act b. Securities Exchange Act of 1934 c. Securities Litigation Uniform Standards Act of 1998 d. Securities Act of 1933 e. Ultramares doctrine f. Audit risk g. Audit failure h. Standards failure i. Business failure j. Absence of causal connection k. Contributory negligence l. Lack of duty to perform m. Private Securities Litigation Reform Act n. Nonnegligent performance ________ 1. A situation in which an incorrect audit opinion is issued because it failed to comply with the requirements of auditing standards. ________ 2. A federal statute dealing with companies that trade securities on national and over-the-counter exchanges. Auditors are involved because the annual reporting requirements include audited financial statements. ________ 3. An auditor's legal defense under which the auditor claims that the client's own actions either resulted in the loss that is the basis for damages or interfered with the conduct of the audit in such a way that prevented the auditor from discovering the cause of the loss. ________ 4. A federal statute that makes it illegal to offer a bribe to an official of a foreign country. ________ 5. A common-law approach to third-party liability in which ordinary negligence is insufficient for liability to third parties, because of the lack of privity of contract between the third-party and the auditor unless the third-party is a primary beneficiary. ________ 6. A federal statute designed to significantly reduce the potential damages in federal securities-related litigation by providing for proportionate liability in most cases. ________ 7. An auditor's legal defense under which the auditor claims that the audit was performed in accordance with generally accepted auditing standards. ________ 8. An auditor's legal defense under which the auditor claims that the failure to follow auditing standards did not cause the damages suffered by the client.

The Foreign Corrupt Practices Act of 1977 allows an injured party to seek treble (triple) damages and recovery of legal fees in cases where it can be demonstrated that the defendant was engaged in a pattern of fraudulent activity.

Which of the following best describes a trend in litigation involving CPAs?

The most significant audit issue that came as a result of the court decision in the Escott et al. v. Bar Chris Construction Corporation case in 1968 was:

The 1136 Tenants case was a criminal case concerning a CPA's failure to uncover fraud during a financial statement audit.

Which of the following required an adequate system of internal control for SEC registrants?

The legal term for when an auditor issues an opinion of an audit, knowing that an adequate audit was not performed is called?

The principal issue to be resolved in cases involving alleged negligence is usually: