Question 1

An attorney's commission of a crime constitutes professional misconduct even absent proof that it reflects adversely on the person's fitness as a lawyer.

Accepted Answer

A) True 
 B)False

Question 2

Under rules of professional conduct that proscribe fraud, state authorities can discipline professionals for engaging in such misconduct.

Accepted Answer

A) True 
 B)False

Question 3

To hold a professional liable for negligence, a plaintiff must show that a duty of care existed and it was breached-proof of an injury is not required.

Accepted Answer

A) True 
 B)False

Question 4

Galen prepares a financial statement for Hobby Inc. before a public offering of its stock. The Securities and Exchange Commission orders a revision of the statement. During the subsequent delay of the offering, the stock price drops. Hobby files a suit against Galen for negligence. Galen's best defense is

Accepted Answer

A)  even if the accountant was negligent, this was not the proximate cause of the drop in the stock price. 
B)  the firm suffered no injury. 
C)  the accountant did not breach any duty of care that it owed to the firm. 
D)  the accountant owed no duty of care to the firm.

Question 5

Norm is an accountant. With respect to an allegation of negligence by Online Retail Inc., one of Norm's clients, Norm's violation of generally accepted accounting principles and generally accepted auditing standards

Accepted Answer

A)  does not indicate that Norm was negligent. 
B)  is prima facie evidence that Norman was negligent. 
C)  precludes Norm from raising any defense against a negligence claim. 
D)  relieves Norm of any legal liability but not professional ethics sanctions.

Question 6

Carbon Company's liabilities exceed its assets. The firm hires Dobie, an accountant, to certify a balance sheet showing a positive net worth. Equity Bank relies on the balance sheet to make a loan to Carbon. The firm defaults. Under the Ultramares rule, Dobie is most likely not liable because he

Accepted Answer

A)  did not owe a duty of care to any third party. 
B)  is not responsible for his client's finances. 
C)  finished his work before the loan and default. 
D)  was not in privity with the bank.

Question 7

An auditor who agrees to examine a client's records for fraud and then fails to detect it is not liable because a normal audit is not intended to uncover fraud.

Accepted Answer

A) True 
 B)False

Question 8

Manufacturing Inc. hires Neri, an accountant, to maintain the company's financial records. Neri does not act negligently or fail to perform any duty but fails to discover that Ollie, the firm's chief finance officer, is embezzling funds from the firm. With respect to the corporation's losses, the accountant is

Accepted Answer

A)  not liable. 
B)  liable for the entire amount. 
C)  liable only for the amount that occurred after the accountant was hired. 
D)  liable only for the amount that cannot be recovered from the embezzler.

Question 9

In view of the reliance of numerous parties on the opinions of auditors, many courts have ceased to hold accountants liable to third parties for negligence.

Accepted Answer

A) True 
 B)False

Question 10

An accountant should destroy working papers on the completion of an audit to avoid the possibility of having to provide evidence in a suit in which the accountant's competence is challenged.

Accepted Answer

A) True 
 B)False

Question 11

A professional who is sanctioned by a court for fraudulent conduct cannot also be penalized by a state board of professional ethics.

Accepted Answer

A) True 
 B)False

Question 12

Enya is an attorney whose clients include Finance Company. If Enya is negligent in her work for Finance, under the Restatement (Third) of Torts, she may be liable to the client and

Accepted Answer

A)  any third party. 
B)  no third party. 
C)  third parties who are foreseen users of the work. 
D)  third parties who are reasonably foreseeable users of the work.

Question 13

Reed prepares federal corporate income tax returns for Shopping Mall Inc. and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for

Accepted Answer

A)  negligent or willful misconduct. 
B)  no misconduct. 
C)  only negligent misconduct. 
D)  only willful misconduct.

Question 14

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

Accepted Answer

A)  actual fraud. 
B)  constructive fraud. 
C)  destructive fraud. 
D)  virtual fraud.

Question 15

Dena, an accountant, contracts to perform services for Equipment Maker Inc. Dena acts in good faith and conforms to generally accepted accounting principles, but makes an incorrect judgment. Dena is most likely

Accepted Answer

A)  liable for negligence. 
B)  liable for breach of contract. 
C)  liable for a violation of state professional ethical standards. 
D)  not liable.

Question 16

Cliff is an attorney whose clients include Data Inc. Unless Data has violated securities law, the contents of Cliff's file on the firm may be disclosed to a third party

Accepted Answer

A)  under no circumstances. 
B)  only under a court order (with or without Data's consent). 
C)  only with Data's consent. 
D)  at Cliff's discretion.

Question 17

Marco is an accountant who prepares his clients' tax returns. Nell is not an accountant, but she also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on

Accepted Answer

A)  Marco and Nell. 
B)  Marco only. 
C)  Nell only. 
D)  none of the choices.

Question 18

In some states, in the absence of privity, or a similarly close relationship, a party cannot recover from an accountant for negligence.

Accepted Answer

A) True 
 B)False

Question 19

It is a felony for anyone-not just accountants-to willfully make false statements in a tax return or to willfully assist others in preparing a false return.

Accepted Answer

A) True 
 B)False

Question 20

Professionals are faced with a decreasing threat of liability as the public becomes more aware that professionals must deliver competent services.

Accepted Answer

A) True 
 B)False

Exam 40: Liability of Accountants and Other Professionals

An attorney's commission of a crime constitutes professional misconduct even absent proof that it reflects adversely on the person's fitness as a lawyer.

Under rules of professional conduct that proscribe fraud, state authorities can discipline professionals for engaging in such misconduct.

To hold a professional liable for negligence, a plaintiff must show that a duty of care existed and it was breached-proof of an injury is not required.

Norm is an accountant. With respect to an allegation of negligence by Online Retail Inc., one of Norm's clients, Norm's violation of generally accepted accounting principles and generally accepted auditing standards

Carbon Company's liabilities exceed its assets. The firm hires Dobie, an accountant, to certify a balance sheet showing a positive net worth. Equity Bank relies on the balance sheet to make a loan to Carbon. The firm defaults. Under the Ultramares rule, Dobie is most likely not liable because he

An auditor who agrees to examine a client's records for fraud and then fails to detect it is not liable because a normal audit is not intended to uncover fraud.

In view of the reliance of numerous parties on the opinions of auditors, many courts have ceased to hold accountants liable to third parties for negligence.

An accountant should destroy working papers on the completion of an audit to avoid the possibility of having to provide evidence in a suit in which the accountant's competence is challenged.

A professional who is sanctioned by a court for fraudulent conduct cannot also be penalized by a state board of professional ethics.

Enya is an attorney whose clients include Finance Company. If Enya is negligent in her work for Finance, under the Restatement (Third) of Torts, she may be liable to the client and

Reed prepares federal corporate income tax returns for Shopping Mall Inc. and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

Dena, an accountant, contracts to perform services for Equipment Maker Inc. Dena acts in good faith and conforms to generally accepted accounting principles, but makes an incorrect judgment. Dena is most likely

Cliff is an attorney whose clients include Data Inc. Unless Data has violated securities law, the contents of Cliff's file on the firm may be disclosed to a third party

Marco is an accountant who prepares his clients' tax returns. Nell is not an accountant, but she also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on

In some states, in the absence of privity, or a similarly close relationship, a party cannot recover from an accountant for negligence.

It is a felony for anyone-not just accountants-to willfully make false statements in a tax return or to willfully assist others in preparing a false return.

Professionals are faced with a decreasing threat of liability as the public becomes more aware that professionals must deliver competent services.