Question 1

________ imposes liability on underwriters and experts for misstatements or omissions of material fact in Securities Act registration statements.

Accepted Answer

A) Section 18 of the Securities Exchange Act of 1934 
B) Section 12(a)(2)of the Securities Exchange Act of 1934 
C) Section 17(b)of the Securities Act of 1933 
D) Section 11 of the Securities Act of 1933

Question 2

Brady,a CPA,is hired by Stanlee Inc. ,to audit its financial statements.Due to his negligence,Brady fails to discover that Tom,chairman of the board of directors of Stanlee,has embezzled $300,000 of the company funds.Brady finishes the audit and issues an unqualified opinion.Six months later,Brady reads in the newspapers that Tom has been caught for embezzling a total of $800,000 of company funds.Tom has resigned and the company funds have been fully recovered from him.Stanlee sues Brady.How much is Brady liable for?

Accepted Answer

A) $300,000 
B) $1,100,000 
C) $800,000 
D) $500,000

Question 3

An accountant can be required to bring his/her working papers into court and to testify as to matters involving the client's tax records and discussions with the client regarding tax matters.

Accepted Answer

A) True 
 B)False

Question 4

Little LLP,a CPA firm,has been doing financial statement auditing for Honesty Corp.for the last 10 years.While auditing last year's financial statements of Honesty,Little finds out that Honesty has overstated assets by 12 percent and revenues by 19 percent to make up for the huge loss it incurred.When Little informed the management of Honesty about this illegal act,Honesty's management threatened to cancel Little's contract with Honesty and demanded back the personal records and working papers from Little.Should Little give them back? Who owns them? Who has right of access to them? If Little is forced by Honesty to destroy those papers,under which Act can Little be punished?

Accepted Answer

The answer of Little LLP,a CPA firm,has been doing financial...

Question 5

Which of the following statements about accountant-client privilege is false?

Accepted Answer

A) The common law does not recognize an accountant-client privilege. 
B) An accountant-client privilege of confidentiality protects communications between accountants and their clients as well as accountants' working papers. 
C) If an accountant's state does not recognize the accountant-client privilege,communications may be protected by the attorney-client privilege if the accountant assisted the attorney in rendering advice to the client. 
D) If an accountant-client privilege exists,the accountant may refuse to disclose the privileged material in a courtroom,even if the client consents to its disclosure.

Question 6

Under Section 11 of the Securities Act of 1933,an auditor who issues an opinion regarding financial statements of a company making a public distribution of securities can be held liable for errors in the expertised portions of the:

Accepted Answer

A) registration statement. 
B) annual 10-K report. 
C) 8-K current report. 
D) proxy statements.

Question 7

Joe Smith is a recent graduate from Sunset College.While at Sunset College,he majored in Business.In his interview for an auditor position at Supermart Inc. ,Mr.Smith convinced the hiring manager he knew enough accounting to perform the job,but in fact,Mr.Smith does not understand Generally Accepted Auditing Standards (GAAS).Mr.Smith has failed to show professional care and could be liable for his actions as an auditor because of his lack of skills.

Accepted Answer

A) True 
 B)False

Question 8

The SEC has adopted ________,which requires an analyst's research report to include the analyst's certification that views expressed in the report accurately reflect his/her personal views.

Accepted Answer

A) Regulation B 
B) Regulation C 
C) Regulation AC 
D) Regulation A

Question 9

Mr.Orange is an accountant at a publicly traded corporation.To meet the standard of the skill of a professional account what should Mr.Orange have knowledge of?

Accepted Answer

A) Calculus and trigonometry 
B) Generally accepted accounting principles (GAAP) 
C) The Professional Rules of Responsibility for Attorneys 
D) The advisory opinions this year of the Internal Revenue Service (IRS)

Question 10

Brown & Co. ,a CPA firm,issued an unqualified opinion on the financial statement of its client,King Corp.Based on the strength of King's financial statements,Safe Bank loaned King $500,000.Brown was unaware that Safe would receive a copy of the financial statements or that they would be used in obtaining a loan by King.King defaulted on the loan.If Safe commences an action for common law fraud against Brown,then to be successful,Safe must prove that in addition to other elements it:

Accepted Answer

A) was in privity of contract with Brown. 
B) was not contributorily negligent. 
C) was in privity of contract with King. 
D) justifiably relied on the financial statements.

Question 11

If a client establishes fraud against a professional,he/she is more likely to receive:

Accepted Answer

A) compensatory and consequential damages. 
B) punitive and consequential damages. 
C) compensatory and punitive damages. 
D) only consequential damages.

Question 12

Hamish invested in the securities of the ABC Corporation (ABC).He lost a great deal of money on those securities after ABC's president admitted that financial statements about the profitability of ABC had been materially exaggerated.Andy Accountant had audited those statements and had issued an unqualified opinion that they complied with GAAS and GAAP.Hamish has sued Andy using Section 10(b)of the Securities Exchange Act of 1934 as the legal basis of his suit.To succeed,Hamish must prove that:

Accepted Answer

A) AA acted with scienter. 
B) Hamish was in privity of contract with ABC or AA. 
C) AA acted negligently. 
D) AA's actions have a connection with intrastate commerce.

Question 13

Usually,only clients sue professionals under the securities law.

Accepted Answer

A) True 
 B)False

Question 14

If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA,which of the following,if present,would be the CPA's best defense?

Accepted Answer

A) The stockholder lacked privity to sue. 
B) The false statements were immaterial. 
C) The CPA did not financially benefit from the alleged fraud. 
D) The client contributed to the negligence.

Question 15

The maximum penalty for a criminal violation of the 1933 Act is a:

Accepted Answer

A) $20,000 fine and one year imprisonment. 
B) $10,000 fine and five years' imprisonment. 
C) $20,000 fine and five years' imprisonment. 
D) $10,000 fine and one year imprisonment.

Question 16

By issuing a qualified opinion,an auditor escapes liability for defects in financial statements audited by the auditor.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following means knowledge on the part of the person making the representation,at the time when they are made,that they are false?

Accepted Answer

A) Scienter 
B) In pari delicto 
C) Fraudulent misrepresentation 
D) Intentional deceit

Question 18

Gamma Company asks Prudent Prime Westin LLP (PPW),a CPA firm,to audit its financial statements.Gamma tells PPW that it plans to use the statements to obtain a loan from Fain Bank.PPW prepares the statements.Gamma uses the statements to obtain a loan from Shaw Bank.The statements falsely state Gamma's financial position due to PPW's negligent preparation of them.When Gamma defaults on the loan,Shaw Bank sues PPW under the common law of negligence.Does PPW have liability to Shaw Bank under the rule of Ultramares? Does PPW have liability to Shaw Bank under the rule of the Restatement (Second)of Torts?

Accepted Answer

The answer of Gamma Company asks Prudent Prime Westin LLP...

Question 19

Which of the following expresses whether the audit has been performed in compliance with GAAS and whether,in the auditor's opinion,the financial statements fairly present the client's financial position and results of operations in conformity with GAAP?

Accepted Answer

A) Opinion letter 
B) Advisory opinion 
C) No-action letter 
D) Compliance letter

Question 20

Which of the following professional liabilities is based on the common law concepts of negligence?

Accepted Answer

A) Penal liability 
B) Tort liability 
C) Primary liability 
D) Contractual liability

Exam 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

________ imposes liability on underwriters and experts for misstatements or omissions of material fact in Securities Act registration statements.

An accountant can be required to bring his/her working papers into court and to testify as to matters involving the client's tax records and discussions with the client regarding tax matters.

Which of the following statements about accountant-client privilege is false?

Under Section 11 of the Securities Act of 1933,an auditor who issues an opinion regarding financial statements of a company making a public distribution of securities can be held liable for errors in the expertised portions of the:

The SEC has adopted ________,which requires an analyst's research report to include the analyst's certification that views expressed in the report accurately reflect his/her personal views.

Mr.Orange is an accountant at a publicly traded corporation.To meet the standard of the skill of a professional account what should Mr.Orange have knowledge of?

If a client establishes fraud against a professional,he/she is more likely to receive:

Usually,only clients sue professionals under the securities law.

If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA,which of the following,if present,would be the CPA's best defense?

The maximum penalty for a criminal violation of the 1933 Act is a:

By issuing a qualified opinion,an auditor escapes liability for defects in financial statements audited by the auditor.

Which of the following means knowledge on the part of the person making the representation,at the time when they are made,that they are false?

Which of the following expresses whether the audit has been performed in compliance with GAAS and whether,in the auditor's opinion,the financial statements fairly present the client's financial position and results of operations in conformity with GAAP?

Which of the following professional liabilities is based on the common law concepts of negligence?