Question 1

Third-party plaintiffs bringing action under common law need NOT prove ________.

Accepted Answer

A) they were damaged or suffered a loss 
B) reliance on the financial statements 
C) the financial statements were direct cause of loss 
D) breach of contract 
A) they were damaged or suffered a loss 
B) reliance on the financial statements 
C) the financial statements were direct cause of loss 
D) breach of contract

Question 2

A relationship of direct involvement between parties to a contract is known as privity.

Accepted Answer

A) True 
 B)False

Question 3

Under Bill C-22,a public accountant could be charged with possession or laundering by accepting a payment from a client that came as a result of the client engaging in a criminal enterprise,even if the accountant didn't specifically know how the money was originally obtained.

Accepted Answer

A) True 
 B)False

Question 4

Due professional care implies that the practitioner is conducting his or her work to the highest possible standard and will make no errors.

Accepted Answer

A) True 
 B)False

Question 5

The landmark case of Ultramares Corporation v.Touche (1931)resulted in which precedent-setting doctrine?

Accepted Answer

A) An audit cannot be held liable to third party claimants,due to lack of privity of contract. 
B) Auditor's owe a duty of care to all known third party claimants. 
C) An auditor's duty of care extends to all third parties for losses that resulted from ordinary auditor negligence. 
D) An auditor's duty of care extends to all third parties when the auditor commits fraud or constructive fraud. 
A) An audit cannot be held liable to third party claimants,due to lack of privity of contract. 
B) Auditor's owe a duty of care to all known third party claimants. 
C) An auditor's duty of care extends to all third parties for losses that resulted from ordinary auditor negligence. 
D) An auditor's duty of care extends to all third parties when the auditor commits fraud or constructive fraud.

Question 6

Reasonably foreseeable third parties are best described as ________.

Accepted Answer

A) management of the company 
B) those that have direct involvement through a contract 
C) those third parties who will rely on the audit and are specifically known by the auditor 
D) Members of a limited class of third parties,known by the auditor,who potentially will rely on the audit but are not specifically known by the auditor 
A) management of the company 
B) those that have direct involvement through a contract 
C) those third parties who will rely on the audit and are specifically known by the auditor 
D) Members of a limited class of third parties,known by the auditor,who potentially will rely on the audit but are not specifically known by the auditor

Question 7

Under common law,which of the following statements most accurately reflects the liability of a CPA who gives a fraudulent opinion on an audit of a client's financial statements?

Accepted Answer

A) The CPA is liable only to third parties who are in privity of contract with the CPA. 
B) The CPA is liable only to known users of the financial statements. 
C) The CPA probably is liable to any person who suffered a loss as a result of the fraud. 
D) The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion. 
A) The CPA is liable only to third parties who are in privity of contract with the CPA. 
B) The CPA is liable only to known users of the financial statements. 
C) The CPA probably is liable to any person who suffered a loss as a result of the fraud. 
D) The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

Question 8

The SEC has the power to establish accounting rules and regulations in the United States.

Accepted Answer

A) True 
 B)False

Question 9

During a review engagement,CPA discovers that the gross margin has increased by 20% over the last few years.To avoid potential liability due to possibly misstated financial statements,what should CPA do?

Accepted Answer

A) Correct the gross margin to be consistent with prior years. 
B) Obtain additional information to correct or substantiate the figures. 
C) No additional work is required for review engagements. 
D) Downgrade the assignment to a compilation engagement. 
A) Correct the gross margin to be consistent with prior years. 
B) Obtain additional information to correct or substantiate the figures. 
C) No additional work is required for review engagements. 
D) Downgrade the assignment to a compilation engagement.

Question 10

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

Accepted Answer

A) Gross negligence in applying generally accepted auditing standards. 
B) Ordinary negligence in applying generally accepted accounting principles. 
C) Identified third-party users. 
D) Scienter. 
A) Gross negligence in applying generally accepted auditing standards. 
B) Ordinary negligence in applying generally accepted accounting principles. 
C) Identified third-party users. 
D) Scienter.

Question 11

Which of the following statements concerning the liability provisions of The Securities Act (1933),is true?

Accepted Answer

A) All people who might be included in a registration legal action must prove that they made a "reasonable investigation" of the financial statements. 
B) The major burdens of affirmative proof in a suit against the auditor shift from the injured plaintiff to the expert accountant. 
C) The purchaser-plaintiff must prove that they relied on the financial statements in the registration statement. 
D) The provisions of the Securities Act do not apply to companies who file a registration statement. 
A) All people who might be included in a registration legal action must prove that they made a "reasonable investigation" of the financial statements. 
B) The major burdens of affirmative proof in a suit against the auditor shift from the injured plaintiff to the expert accountant. 
C) The purchaser-plaintiff must prove that they relied on the financial statements in the registration statement. 
D) The provisions of the Securities Act do not apply to companies who file a registration statement.

Question 12

What is a primary beneficiary?

Accepted Answer

A primary beneficiary is a third party f

Question 13

What is privity?

Accepted Answer

A relationship of direct invol

Question 14

The relationship of direct involvement between parties to a contract is also known as _________.

Accepted Answer

A) statutory obligation 
B) association 
C) privity 
D) causal connection 
A) statutory obligation 
B) association 
C) privity 
D) causal connection

Question 15

In a common law action against an accountant,lack of privity is a viable defence if the plaintiff ________.

Accepted Answer

A) is the client's creditor who sues the accountant for negligence 
B) can prove the presence of gross negligence that amounts to a reckless disregard for the truth 
C) is the accountant's client 
D) bases the action upon fraud 
A) is the client's creditor who sues the accountant for negligence 
B) can prove the presence of gross negligence that amounts to a reckless disregard for the truth 
C) is the accountant's client 
D) bases the action upon fraud

Question 16

If a public accountant becomes suspicious about a client's source of financing during the course of an engagement,the public accountant should refrain from investigating any further,to avoid being charged as a co-conspirator to money laundering activities.

Accepted Answer

A) True 
 B)False

Question 17

In contrast to its concern for the quality of accounting principles,the SEC's involvement in auditing standards and procedural matters has been minimal since the developments of the McKesson and Robbins affair.

Accepted Answer

A) True 
 B)False

Question 18

What are the legal liabilities of professional accountants under the common law?

Accepted Answer

Accountants are liable under the common

Question 19

The lessons for accountants that are inherent in the 1136 Tenants' Corporation v.Rothenberg & Co.case include all of the following EXCEPT which one?

Accepted Answer

A) Engagement letters are as essential for accounting engagements as they are for audit engagements. 
B) Regardless of the nature of the engagement,a public accountant should be alert for and should follow up on any unusual items such as missing invoices. 
C) Accountants should clearly communicate the extent of their association with financial information. 
D) Public accountants cannot be held liable to third parties in non-audit or review engagements. 
A) Engagement letters are as essential for accounting engagements as they are for audit engagements. 
B) Regardless of the nature of the engagement,a public accountant should be alert for and should follow up on any unusual items such as missing invoices. 
C) Accountants should clearly communicate the extent of their association with financial information. 
D) Public accountants cannot be held liable to third parties in non-audit or review engagements.

Question 20

Even in a review engagement,the accountant cannot merely accept client-supplied information that appears to be false or misleading.

Accepted Answer

A) True 
 B)False

Exam 20: Legal Liability Cases

Third-party plaintiffs bringing action under common law need NOT prove ________.

A relationship of direct involvement between parties to a contract is known as privity.

Under Bill C-22,a public accountant could be charged with possession or laundering by accepting a payment from a client that came as a result of the client engaging in a criminal enterprise,even if the accountant didn't specifically know how the money was originally obtained.

Due professional care implies that the practitioner is conducting his or her work to the highest possible standard and will make no errors.

The landmark case of Ultramares Corporation v.Touche (1931)resulted in which precedent-setting doctrine?

Reasonably foreseeable third parties are best described as ________.

Under common law,which of the following statements most accurately reflects the liability of a CPA who gives a fraudulent opinion on an audit of a client's financial statements?

The SEC has the power to establish accounting rules and regulations in the United States.

During a review engagement,CPA discovers that the gross margin has increased by 20% over the last few years.To avoid potential liability due to possibly misstated financial statements,what should CPA do?

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

Which of the following statements concerning the liability provisions of The Securities Act (1933),is true?

What is a primary beneficiary?

What is privity?

The relationship of direct involvement between parties to a contract is also known as _________.

In a common law action against an accountant,lack of privity is a viable defence if the plaintiff ________.

If a public accountant becomes suspicious about a client's source of financing during the course of an engagement,the public accountant should refrain from investigating any further,to avoid being charged as a co-conspirator to money laundering activities.

In contrast to its concern for the quality of accounting principles,the SEC's involvement in auditing standards and procedural matters has been minimal since the developments of the McKesson and Robbins affair.

What are the legal liabilities of professional accountants under the common law?

The lessons for accountants that are inherent in the 1136 Tenants' Corporation v.Rothenberg & Co.case include all of the following EXCEPT which one?

Even in a review engagement,the accountant cannot merely accept client-supplied information that appears to be false or misleading.

Introduction to Auditing

Auditors Professional Roles and Responsibilities

Auditors Ethical and Legal Responsibilities

Reports on Audited Financial Statements

Preliminary Audit Planning: Understanding the Auditees Business

Assessing Risks in an Audit Engagement

Internal Control Over Financial Reporting

Audit Evidence and Assurance

Control Assessment and Testing

Audit Sampling

The Revenues, receivables, and Receipts Process and Cash Account Balance

The Purchases, payables, and Payments Process

Payroll and Production Processes

The Finance and Investment Process

Completing the Audit Work

Applying Professional Judgment to Form the Audit Opinion and Issue the Audit Report

Other Public Accounting Services and Reportsreviews and Compilations

Professional Rules of Conduct Details and Auditor Responsibilities

The Audit of Accounting Estimates: Basic Material Relating to Accounting Estimates

Other Professional Accounting Services and Reports, including Fraud Auditing

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