Question 1

Section 11(a) of the Securities Act of 1933 imposes liability on accountants for:

Accepted Answer

A)  misstatements or omissions of material facts furnished in registration statements. 
B)  inadvertent error in the information provided by the client. 
C)  accidental miscalculations in audits. 
D)  statements of opinion. 
A)  misstatements or omissions of material facts furnished in registration statements. 
B)  inadvertent error in the information provided by the client. 
C)  accidental miscalculations in audits. 
D)  statements of opinion.

Question 2

Which of the following statements is true of liability to third persons?

Accepted Answer

A)  Contract law has been widely used by third persons suffering damages as a result of an accountant's breach in the absence of special circumstances. 
B)  At common law, recovery by a creditor was not permitted on the theory that the creditor was a third-party beneficiary of the contract employing the accountant. 
C)  Common law required showing that the accountant was aware that the audit was ordered to satisfy the demand of a creditor or prospective creditor. 
D)  Historically, third-party suits against accountants were generally permitted by the privity doctrine. 
A)  Contract law has been widely used by third persons suffering damages as a result of an accountant's breach in the absence of special circumstances. 
B)  At common law, recovery by a creditor was not permitted on the theory that the creditor was a third-party beneficiary of the contract employing the accountant. 
C)  Common law required showing that the accountant was aware that the audit was ordered to satisfy the demand of a creditor or prospective creditor. 
D)  Historically, third-party suits against accountants were generally permitted by the privity doctrine.

Question 3

Raunak, an accountant, has been subpoenaed to testify and produce its working papers as well as conversations regarding a lawsuit brought against Shyam, one of his clients. Which of the following statements is true of Raunak's attempt to avoid having to present such evidence?

Accepted Answer

A)  The federal law recognizes the existence of the privileged communication rule if the accountant is certified. 
B)  The privilege of confidentiality is available regarding working papers since the accountant is deemed to own them. 
C)  The privilege of confidentiality is as widely available as the attorney-client privilege. 
D)  The law does not recognize the existence of the privileged communication rule between accountants and their clients. 
A)  The federal law recognizes the existence of the privileged communication rule if the accountant is certified. 
B)  The privilege of confidentiality is available regarding working papers since the accountant is deemed to own them. 
C)  The privilege of confidentiality is as widely available as the attorney-client privilege. 
D)  The law does not recognize the existence of the privileged communication rule between accountants and their clients.

Question 4

Rule 10b-5 of the Securities Act of 1934 prohibits any person from making a misstatement or omission of a material fact in connection with the:

Accepted Answer

A)  mortgage of real estate. 
B)  mortgage of constructing a building. 
C)  purchase or sale of any security. 
D)  purchase or sale of a property. 
A)  mortgage of real estate. 
B)  mortgage of constructing a building. 
C)  purchase or sale of any security. 
D)  purchase or sale of a property.

Question 5

Accuracy Group, an accounting firm, has been given a deadline by its client to prepare an audit report by February 28. The deadline was proposed by a prospective lender to the client. Accuracy Group agrees to complete the audit by February 28. If the audit report is not finished until after the deadline, then Accuracy Group would:

Accepted Answer

A)  be liable even if the delay occurred because the client obstructed performance of the audit. 
B)  not be liable if it had other deadlines to meet at the same time. 
C)  be liable for the client's resulting loss if the lender has no more funds available at that time. 
D)  not be liable if it had delegated its responsibilities to another accounting firm. 
A)  be liable even if the delay occurred because the client obstructed performance of the audit. 
B)  not be liable if it had other deadlines to meet at the same time. 
C)  be liable for the client's resulting loss if the lender has no more funds available at that time. 
D)  not be liable if it had delegated its responsibilities to another accounting firm.

Question 6

An accountant who violates the federal securities acts may be subjected to an administrative hearing before the Federal Trade Commission (FTC).

Accepted Answer

A) True 
 B)False

Question 7

Many courts today have refused to apply the privity doctrine to third-party negligence suits against accountants.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is true of the Sarbanes-Oxley Act of 2002?

Accepted Answer

A)  It requires foreign accounting firms to register with the Public Company Accounting Oversight Board if they audit public companies. 
B)  The act reduces criminal penalties for securities fraud. 
C)  Its registration and reporting provisions apply only to U.S. companies listed on U.S. securities exchanges. 
D)  Section 106 of the act deals expressly with national accounting firms. 
A)  It requires foreign accounting firms to register with the Public Company Accounting Oversight Board if they audit public companies. 
B)  The act reduces criminal penalties for securities fraud. 
C)  Its registration and reporting provisions apply only to U.S. companies listed on U.S. securities exchanges. 
D)  Section 106 of the act deals expressly with national accounting firms.

Question 9

Identify the true statement concerning communications between clients and accountants.

Accepted Answer

A)  In all states, communications between clients and accountants are treated the same way communications between clients and attorneys are treated. 
B)  Communications between clients and accountants are treated by courts as privileged in the vast majority of states. 
C)  Even if a state has a statute that grants protection to accountants' working papers, federal courts do not always recognize such state statutes. 
D)  The accountant can never be forced to testify about the client's records and about conversations that the accountant had with the client. 
A)  In all states, communications between clients and accountants are treated the same way communications between clients and attorneys are treated. 
B)  Communications between clients and accountants are treated by courts as privileged in the vast majority of states. 
C)  Even if a state has a statute that grants protection to accountants' working papers, federal courts do not always recognize such state statutes. 
D)  The accountant can never be forced to testify about the client's records and about conversations that the accountant had with the client.

Question 10

An accountant may have conducted such a limited audit that she does not feel able to offer an opinion as to the accuracy of the client's financial statements. In such situations, the accountant may issue a(n) _____.

Accepted Answer

A)  qualified opinion 
B)  disclaimer 
C)  unaudited statement 
D)  opinion letter 
A)  qualified opinion 
B)  disclaimer 
C)  unaudited statement 
D)  opinion letter

Question 11

Section 18(a) of the Securities Act of 1934:

Accepted Answer

A)  requires that the plaintiff prove reliance. 
B)  makes an accountant liable for accidental mistakes in the audit. 
C)  is not triggered by reliance. 
D)  requires the accountant to prove that he exercised due diligence. 
A)  requires that the plaintiff prove reliance. 
B)  makes an accountant liable for accidental mistakes in the audit. 
C)  is not triggered by reliance. 
D)  requires the accountant to prove that he exercised due diligence.

Question 12

The near privity approach was adopted by courts in contrast to the strict privity rule of the:

Accepted Answer

A)  Balancing approach. 
B)  Reasonably Foreseeable Users approach. 
C)  Ultramares approach. 
D)  Restatement approach. 
A)  Balancing approach. 
B)  Reasonably Foreseeable Users approach. 
C)  Ultramares approach. 
D)  Restatement approach.

Question 13

Under Section 11 of the Securities Act of 1933, the purchaser must sue the accountant within three (3) years after the time the misstatement or omission was or should have been discovered.

Accepted Answer

A) True 
 B)False

Question 14

An accountant cannot be held liable for aiding and abetting misleading information if the information were prepared by others.

Accepted Answer

A) True 
 B)False

Question 15

The liability of the accountant can be both civil and criminal.

Accepted Answer

A) True 
 B)False

Question 16

An accountant may be forced by a subpoena to make available to the Internal Revenue Service (IRS) working papers involving a client who is being investigated.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is true of the criminal liabilities under the Securities Act of 1933?

Accepted Answer

A)  A willful misrepresentation, including an omission, in a registration statement is made a criminal act. 
B)  The 1933 Act makes it a crime to willfully make a false or misleading statement in reports that are required to be filed under the act. 
C)  The criminal provisions of the 1933 Act specifically mention that they will be used against accountants. 
D)  A willful violation of Rule 10b-5 is a crime under the 1933 Act. 
A)  A willful misrepresentation, including an omission, in a registration statement is made a criminal act. 
B)  The 1933 Act makes it a crime to willfully make a false or misleading statement in reports that are required to be filed under the act. 
C)  The criminal provisions of the 1933 Act specifically mention that they will be used against accountants. 
D)  A willful violation of Rule 10b-5 is a crime under the 1933 Act.

Question 18

Explain the Ultramares approach to third-party negligence suits against accountants.

Accepted Answer

Historically, third-party suits against

Question 19

Which of the following is an approach to third-party negligence actions?

Accepted Answer

A)  Strict privity approach 
B)  Near privity approach 
C)  Reasonable person approach 
D)  No delegation approach 
A)  Strict privity approach 
B)  Near privity approach 
C)  Reasonable person approach 
D)  No delegation approach

Question 20

The main basis of liability for accountants is the duty to exercise ordinary skill and care.

Accepted Answer

A) True 
 B)False

Exam 32: Legal Liability of Accountants

Section 11(a) of the Securities Act of 1933 imposes liability on accountants for:

Which of the following statements is true of liability to third persons?

Raunak, an accountant, has been subpoenaed to testify and produce its working papers as well as conversations regarding a lawsuit brought against Shyam, one of his clients. Which of the following statements is true of Raunak's attempt to avoid having to present such evidence?

Rule 10b-5 of the Securities Act of 1934 prohibits any person from making a misstatement or omission of a material fact in connection with the:

An accountant who violates the federal securities acts may be subjected to an administrative hearing before the Federal Trade Commission (FTC).

Many courts today have refused to apply the privity doctrine to third-party negligence suits against accountants.

Which of the following statements is true of the Sarbanes-Oxley Act of 2002?

Identify the true statement concerning communications between clients and accountants.

An accountant may have conducted such a limited audit that she does not feel able to offer an opinion as to the accuracy of the client's financial statements. In such situations, the accountant may issue a(n) _____.

Section 18(a) of the Securities Act of 1934:

The near privity approach was adopted by courts in contrast to the strict privity rule of the:

Under Section 11 of the Securities Act of 1933, the purchaser must sue the accountant within three (3) years after the time the misstatement or omission was or should have been discovered.

An accountant cannot be held liable for aiding and abetting misleading information if the information were prepared by others.

The liability of the accountant can be both civil and criminal.

An accountant may be forced by a subpoena to make available to the Internal Revenue Service (IRS) working papers involving a client who is being investigated.

Which of the following is true of the criminal liabilities under the Securities Act of 1933?

Explain the Ultramares approach to third-party negligence suits against accountants.

Which of the following is an approach to third-party negligence actions?

The main basis of liability for accountants is the duty to exercise ordinary skill and care.

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