Question 1

Most of the burden of affirmative proof is on the defendant under common law.

Accepted Answer

A) True 
 B)False  False

Question 2

Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?

Accepted Answer

A)  The CPA knew of the misstatement.
B)  The CPA was negligent.
C)  Material misstatements were contained in the financial statements.
D)  The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA. C

Question 3

Bugle Corp.approved a plan of merger with Stanley Corp.One of the determining factors in approving the merger was the strong financial statements of Stanley which were audited by Dennis & Co. ,CPAs.Bugle had engaged Dennis to audit Stanley's financial statements.While performing the audit,Dennis failed to discover certain instances of fraud which have subsequently caused Bugle to suffer substantial losses.In order for Dennis to be liable under common law,Bugle,at a minimum,must prove that Dennis:

Accepted Answer

A)  Acted recklessly or with lack of reasonable grounds for belief.
B)  Knew of the instances of fraud.
C)  Failed to exercise due care.
D)  Was grossly negligent. C

Question 4

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan;the auditor did not know the identity of the bank that would eventually give the loan.Under the Restatement of Torts approach to liability,the auditor is generally liable to the bank which subsequently grants the loan for:

Accepted Answer

A)  Lack of due diligence.
B)  Lack of good faith.
C)  Gross negligence,but not ordinary negligence.
D)  Either ordinary or gross negligence.

Question 5

Section 11 of the Securities Act of 1933,and Section 10 of the Securities Exchange Act of 1934 make a CPA potentially liable to a purchaser of registered securities.For items a through f,place a checkmark (? )under the column if the plaintiff must prove its existence:
 $$\begin{array} { | l | l | l | l | } 
\hline & \text { Plaintiff must provide } & \begin{array} { l } 
\text { Section } 11 \text { (1933 } \
\text { Securities Act) }
\end{array} & \begin{array} { l } 
\text { Section } 10 \text { (1934 } \
\text { Securities Exchange } \
\text { Act) }
\end{array} \
\hline \text { a. } & \text { Financial statements were } & & \
&\text { misleading. } & & \
\hline \text { b. } & \begin{array} { l } 
\text { CPA did not perform with } \
\text { due diligence. }
\end{array} & & \
\hline \text { c. } & \begin{array} { l } 
\text { Plaintiff relied upon the } \
\text { financial statements. }
\end{array} & & \
\hline \text { d. } & \text { CPA acted with scienter. } & & \
\hline \text { e. } & \text { Plaintiff suffered a loss. } & & \
\hline \text { f. } & \begin{array} { l } 
\text { Plaintiff was the primary } \
\text { beneficiary of the audit. }
\end{array} & & \
\hline
\end{array}$$

Accepted Answer

The answer of Section 11 of the Securities Act of...

Question 6

Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements?

Accepted Answer

A)  Lack of due diligence.
B)  Due professional care.
C)  Contributory negligence on the part of the client.
D)  A disclaimer contained in the engagement letter.

Question 7

The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for:

Accepted Answer

A)  Only criminal acts.
B)  Either ordinary or gross negligence.
C)  Only gross negligence.
D)  Only fraud.

Question 8

In addition to proving a loss,which of the following must be proven by a third party suing a CPA under Section 10 of the 1934 Securities Exchange Act?  
$\begin{array}{lll}&\text { Misleading Financial Statements }&\text { Reliance on financial statements }\
\text { A } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

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

Question 9

Which of the following court cases highlighted the need for obtaining engagement letters for professional services?

Accepted Answer

A)  Ultramares v.Touche.
B)  Rosenblum v.Adler.
C)  Hochfelder v.Ernst.
D)  1136 Tenants Corporation v.Rothenberg.

Question 10

Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?

Accepted Answer

A)  Due Diligence Approach.
B)  Ultramares Approach.
C)  Restatement of Torts Approach.
D)  Rosenblum Approach.

Question 11

A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan.In a suit by the bank issuing the loan,the CPA's best defense would be that the:

Accepted Answer

A)  Audit complied with generally accepted auditing standards.
B)  Client was aware of the misstatements.
C)  Bank was not the CPA's client.
D)  Bank's identity was known to the CPA prior to completion of the audit.

Question 12

A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933.Based on a misstatement in the financial statements,the CPA is being sued by an investor who purchased shares of this public offering.Which of the following represents a viable defense?

Accepted Answer

A)  The investor has not proven CPA negligence.
B)  The investor did not rely upon the financial statement.
C)  The CPA detected the misstatement after the audit report date.
D)  The audit work was adequate to support the CPA's opinion.

Question 13

Under which act (or acts)may liability charges be filed against a CPA who has performed a financial statement review for a public company?  
$\begin{array}{lll}&\text { Securities Act of } 1933&\text { Securities Exchange Act of } 1934\
\text { A } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

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

Question 14

A case by a client against its CPA firm alleging negligence would be brought under:

Accepted Answer

A)  The Securities Act of 1933.
B)  The Securities Exchange Act of 1934.
C)  The state blue sky laws.
D)  Common law.

Question 15

The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who:

Accepted Answer

A)  Unknowingly violates the 1934 Securities Exchange Act.
B)  Knowingly or unknowingly violates the 1934 Securities Exchange Act.
C)  Unknowingly violates the 1933 Securities Act.
D)  Knowingly or unknowingly violates the 1933 Securities Act.

Question 16

Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995?

Accepted Answer

A)  It provides certain small investors better recovery rights than it does large investors.
B)  It retains joint and several liability in certain circumstances.
C)  It makes recovery against CPAs more difficult under common law litigation.
D)  It eliminates securities fraud as an offense under civil RICO.

Question 17

If a CPA recklessly departs from the standards of due care when conducting an audit,the CPA will be liable to third parties who are unknown to the CPA based on

Accepted Answer

A)  Negligence.
B)  Gross negligence.
C)  Strict liability.
D)  Criminal deceit.

Question 18

Assume that $800,000 in damages are awarded to a plaintiff,and the CPA's percentage of responsibility established at 20%,while others are responsible for the other 80%.Assume the others have no financial resources.The CPA has been required to pay $160,000.The auditor's liability is most likely based upon which approach to assessing liability?

Accepted Answer

A)  Absolute liability.
B)  Contributory negligence.
C)  Joint and several liability.
D)  Proportional liability.

Question 19

The Ultramares v.Touche case established that auditors could be held liable to a known third party for ordinary negligence.

Accepted Answer

A) True 
 B)False

Question 20

In addition to proving a loss,which of the following must be proven by a third party suing a CPA under Section 11 of the 1933 Securities Act? $\begin{array}{lll}&\text { Misleading Financial Statements }&\text { Reliance on financial statements }\
\text { A } & \text { Yes } & \text { Yes } \
\text { B. } & \text { Yes } & \text { No } \
\text { C. } & \text { No } & \text { Yes } \
\text { D. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

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

Exam 4: Legal Liability of Cpas

Most of the burden of affirmative proof is on the defendant under common law.

Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?

Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements?

The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for:

Which of the following court cases highlighted the need for obtaining engagement letters for professional services?

Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?

A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan.In a suit by the bank issuing the loan,the CPA's best defense would be that the:

A case by a client against its CPA firm alleging negligence would be brought under:

The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who:

Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995?

If a CPA recklessly departs from the standards of due care when conducting an audit,the CPA will be liable to third parties who are unknown to the CPA based on

The Ultramares v.Touche case established that auditors could be held liable to a known third party for ordinary negligence.