Question 1

A group typically included as "third parties" in common law is:

Accepted Answer

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

Question 2

The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties, an auditor (1) must know and intend that the work product would be used by the third-party for a specific purpose, and (2) the knowledge and intent must be evidenced by the auditor's conduct.

Accepted Answer

A) True 
 B)False

Question 3

The Private Securities Litigation Reform Act of 1995 reduced potential damages in securities-related litigation, but because the act applied only to federal courts, attorneys began taking cases to state courts. Which of the following eliminated this loophole?

Accepted Answer

A)  Private Securities Litigation Reform Amendment 
B)  Securities Litigation Uniform Standards Act of 1998 
C)  Racketeer Influenced and Corrupt Organization Act 
D)  U.S. Securities Claims Reform Act 
A)  Private Securities Litigation Reform Amendment 
B)  Securities Litigation Uniform Standards Act of 1998 
C)  Racketeer Influenced and Corrupt Organization Act 
D)  U.S. Securities Claims Reform Act

Question 4

A major purpose of federal securities regulations is to:

Accepted Answer

A)  provide sufficient reliable information to the investing public who purchase securities in the marketplace. 
B)  establish the qualifications for accountants who are members of the profession. 
C)  eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public. 
D)  provide a set of uniform standards and tests for accountants, attorneys, and others who practice before the Securities and Exchange Commission. 
A)  provide sufficient reliable information to the investing public who purchase securities in the marketplace. 
B)  establish the qualifications for accountants who are members of the profession. 
C)  eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public. 
D)  provide a set of uniform standards and tests for accountants, attorneys, and others who practice before the Securities and Exchange Commission.

Question 5

Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?

Accepted Answer

A)  Private Securities Litigation Reform Act 
B)  Public Securities Damages and Settlements Act 
C)  Racketeer Influenced and Corrupt Organization Act 
D)  U.S. Securities Claims Reform Act 
A)  Private Securities Litigation Reform Act 
B)  Public Securities Damages and Settlements Act 
C)  Racketeer Influenced and Corrupt Organization Act 
D)  U.S. Securities Claims Reform Act

Question 6

In the auditing environment, failure to meet auditing standards is often:

Accepted Answer

A)  an accepted practice. 
B)  a suggestion of negligence. 
C)  conclusive evidence of negligence. 
D)  tantamount to criminal behavior. 
A)  an accepted practice. 
B)  a suggestion of negligence. 
C)  conclusive evidence of negligence. 
D)  tantamount to criminal behavior.

Question 7

As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft?

Accepted Answer

A)  He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees. 
B)  He would have no liability because privity of contract is lacking. 
C)  He would be liable for losses attributable to his negligence. 
D)  He would be liable only if it could be proven that he was grossly negligent. 
A)  He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees. 
B)  He would have no liability because privity of contract is lacking. 
C)  He would be liable for losses attributable to his negligence. 
D)  He would be liable only if it could be proven that he was grossly negligent.

Question 8

The Sarbanes-Oxley Act of 2002 makes it felony to destroy or create documents to impede or obstruct a federal investigation. Those provisions were adopted following which of the following legal cases?

Accepted Answer

A)  United States v. Natelli 
B)  United States v. Andersen 
C)  ESM Government Securities v. Alexander Grant & Co. 
D)  United States v. Simon 
A)  United States v. Natelli 
B)  United States v. Andersen 
C)  ESM Government Securities v. Alexander Grant & Co. 
D)  United States v. Simon

Question 9

Under the Securities Act of 1933, the auditor's responsibility for making sure the financial statements were fairly stated extends to:

Accepted Answer

A)  the date of the financial statements. 
B)  the date the registration statement becomes effective. 
C)  the date of the audit report. 
D)  one year beyond the date of the financial statements. 
A)  the date of the financial statements. 
B)  the date the registration statement becomes effective. 
C)  the date of the audit report. 
D)  one year beyond the date of the financial statements.

Question 10

Discuss some of the steps individual practicing auditors can take to minimize their legal liability.

Accepted Answer

There are many steps individual practiti

Question 11

Discuss the sanctions the Securities and Exchange Commission can impose on auditors.

Accepted Answer

The SEC has the power in certain circums

Question 12

The only parties who can recover from auditors under the Securities Act of 1933 are original purchasers of securities.

Accepted Answer

A) True 
 B)False

Question 13

Distinguish between constructive fraud and fraud.

Accepted Answer

Constructive fraud is the existence of e

Question 14

The basic legal concept which was affirmed in the 1985 New York case, Credit Alliance, was that:

Accepted Answer

A)  the auditor's defense of privity of contract is still valid against third parties. 
B)  the auditor is liable for ordinary negligence to specifically foreseen third parties. 
C)  the auditor is liable for ordinary negligence to reasonably foreseeable third parties. 
D)  the auditor's defense of contributory negligence is no longer valid. 
A)  the auditor's defense of privity of contract is still valid against third parties. 
B)  the auditor is liable for ordinary negligence to specifically foreseen third parties. 
C)  the auditor is liable for ordinary negligence to reasonably foreseeable third parties. 
D)  the auditor's defense of contributory negligence is no longer valid.

Question 15

Which of the following is not likely a factor in the increase in the number of lawsuits and sizes of awards to plaintiffs related to auditor behavior?

Accepted Answer

A)  Increased awareness of auditor responsibilities by users of financial statements. 
B)  CPA firms are more willing to settle lawsuits. 
C)  Difficulty judges and jurors have in understanding legal matters. 
D)  Increased consciousness on the part of the SEC for its responsibility to protect investors. 
A)  Increased awareness of auditor responsibilities by users of financial statements. 
B)  CPA firms are more willing to settle lawsuits. 
C)  Difficulty judges and jurors have in understanding legal matters. 
D)  Increased consciousness on the part of the SEC for its responsibility to protect investors.

Question 16

Laws that have been passed by the U.S. Congress and other governmental units are:

Accepted Answer

A)  statutory laws. 
B)  judicial laws. 
C)  federal laws. 
D)  common laws. 
A)  statutory laws. 
B)  judicial laws. 
C)  federal laws. 
D)  common laws.

Question 17

An example of a breach of contract would likely include:

Accepted Answer

A)  an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees. 
B)  a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. 
C)  a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative. 
D)  an auditor's claim that the client staff is unqualified. 
A)  an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees. 
B)  a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. 
C)  a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative. 
D)  an auditor's claim that the client staff is unqualified.

Question 18

In a leading securities law and CPA liabilities case, the U.S. Supreme Court ruled in 1976 in Hochfelder v. Ernst & Ernst that before CPAs could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934, what would be required to be shown to the court was the auditor's:

Accepted Answer

A)  ordinary negligence. 
B)  gross negligence. 
C)  knowledge and intent to deceive. 
D)  financial gain at the expense of the plaintiff. 
A)  ordinary negligence. 
B)  gross negligence. 
C)  knowledge and intent to deceive. 
D)  financial gain at the expense of the plaintiff.

Question 19

Which of the following, if present, would most likely support a finding of constructive fraud on the part of a CPA?

Accepted Answer

A)  Gross negligence in applying GAAS 
B)  Ordinary negligence in applying GAAS 
C)  Lack of duty to perform 
D)  Contributory negligence 
A)  Gross negligence in applying GAAS 
B)  Ordinary negligence in applying GAAS 
C)  Lack of duty to perform 
D)  Contributory negligence

Question 20

The major conclusion of the 1931 Ultramares case was that:

Accepted Answer

A)  ordinary negligence is insufficient for liability to third parties. 
B)  ordinary negligence is sufficient for liability to third-party beneficiaries. 
C)  fraud or gross negligence is sufficient for liability to third parties. 
D)  auditors have no liabilities to third parties. 
A)  ordinary negligence is insufficient for liability to third parties. 
B)  ordinary negligence is sufficient for liability to third-party beneficiaries. 
C)  fraud or gross negligence is sufficient for liability to third parties. 
D)  auditors have no liabilities to third parties.

Exam 5: Legal Liability

A group typically included as "third parties" in common law is:

The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties, an auditor (1) must know and intend that the work product would be used by the third-party for a specific purpose, and (2) the knowledge and intent must be evidenced by the auditor's conduct.

The Private Securities Litigation Reform Act of 1995 reduced potential damages in securities-related litigation, but because the act applied only to federal courts, attorneys began taking cases to state courts. Which of the following eliminated this loophole?

A major purpose of federal securities regulations is to:

Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?

In the auditing environment, failure to meet auditing standards is often:

The Sarbanes-Oxley Act of 2002 makes it felony to destroy or create documents to impede or obstruct a federal investigation. Those provisions were adopted following which of the following legal cases?

Under the Securities Act of 1933, the auditor's responsibility for making sure the financial statements were fairly stated extends to:

Discuss some of the steps individual practicing auditors can take to minimize their legal liability.

Discuss the sanctions the Securities and Exchange Commission can impose on auditors.

The only parties who can recover from auditors under the Securities Act of 1933 are original purchasers of securities.

Distinguish between constructive fraud and fraud.

The basic legal concept which was affirmed in the 1985 New York case, Credit Alliance, was that:

Which of the following is not likely a factor in the increase in the number of lawsuits and sizes of awards to plaintiffs related to auditor behavior?

Laws that have been passed by the U.S. Congress and other governmental units are:

An example of a breach of contract would likely include:

In a leading securities law and CPA liabilities case, the U.S. Supreme Court ruled in 1976 in Hochfelder v. Ernst & Ernst that before CPAs could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934, what would be required to be shown to the court was the auditor's:

Which of the following, if present, would most likely support a finding of constructive fraud on the part of a CPA?

The major conclusion of the 1931 Ultramares case was that:

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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