Question 1

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Accepted Answer

A) True 
 B)False

Question 2

Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion,even though there was no intent to deceive financial statement users.This description is the legal term for:

Accepted Answer

A)  ordinary negligence. 
B)  gross negligence. 
C)  constructive fraud. 
D)  fraud.

Question 3

The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the:

Accepted Answer

A)  prudent person concept. 
B)  common law doctrine. 
C)  constructive care concept. 
D)  vigilant person concept.

Question 4

CPAs can be held liable for criminal activity under both state and federal laws.Infamous cases have involved United States vs.Natelli and ESM Government Securities v.Alexander Grant and Co.Discuss what occurred and prepare a summary of the court findings.

Accepted Answer

The answer of CPAs can be held liable for criminal...

Question 5

In the auditing environment,failure to meet auditing standards is often:

Accepted Answer

A)  an accepted practice. 
B)  a suggestion of negligence. 
C)  conclusive evidence of negligence. 
D)  tantamount to criminal behavior.

Question 6

One of the changes in auditing procedure which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using:

Accepted Answer

A)  letters of representation. 
B)  confirmation letters. 
C)  engagement letters. 
D)  billet doux letters.

Question 7

Under the Securities Act of 1933:

Accepted Answer

A)  any party who relies on the company's audited financial statements can recover from the auditors. 
B)  third-party users must prove that the auditor was negligent. 
C)  the burden of proof is on the defendant. 
D)  auditors face potential legal exposure for information contained in the Form 10-Q.

Question 8

Fraud occurs when:

Accepted Answer

A)  a misstatement is made and there is both knowledge of its falsity and the intent to deceive. 
B)  a misstatement is made and there is knowledge of its falsity but no intent to deceive. 
C)  the auditor lacks even slight care in the performance in performing the audit. 
D)  the auditor has an absence of reasonable care in the performance of the audit.

Question 9

There are four major sources of an auditor's legal liability.One source is liability to the audit client.List the other three sources.

Accepted Answer

The answer of There are four major sources of an...

Question 10

Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to as:

Accepted Answer

A)  the antifraud provisions. 
B)  the new issues provisions. 
C)  the full employment act for accountants. 
D)  the RICO provisions.

Question 11

An example of auditor legal liability to third parties under common law would be the federal government prosecuting an auditor for knowingly issuing an incorrect audit report.

Accepted Answer

A) True 
 B)False

Question 12

Discuss some of the steps individual practicing auditors can take to minimize their legal liability.

Accepted Answer

The answer of Discuss some of the steps individual practicing...

Question 13

The standard of due care to which the auditor is expected to be held is referred to as the prudent person concept.

Accepted Answer

A) True 
 B)False

Question 14

Three approaches to the application of the foreseen users' concept are (1)the Credit Alliance approach,(2)the restatement of torts approach,and (3)the foreseeable user approach.Summarize each of these three approaches.

Accepted Answer

The answer of Three approaches to the application of the...

Question 15

An example of a breach of contract would likely include:

Accepted Answer

A)  an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees. 
B)  a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. 
C)  a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative. 
D)  an auditor's claim that the client staff is unqualified.

Exam 4: Legal Liability Considerations for Auditors

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion,even though there was no intent to deceive financial statement users.This description is the legal term for:

The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the:

CPAs can be held liable for criminal activity under both state and federal laws.Infamous cases have involved United States vs.Natelli and ESM Government Securities v.Alexander Grant and Co.Discuss what occurred and prepare a summary of the court findings.

In the auditing environment,failure to meet auditing standards is often:

One of the changes in auditing procedure which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using:

Under the Securities Act of 1933:

Fraud occurs when:

There are four major sources of an auditor's legal liability.One source is liability to the audit client.List the other three sources.

Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to as:

An example of auditor legal liability to third parties under common law would be the federal government prosecuting an auditor for knowingly issuing an incorrect audit report.

Discuss some of the steps individual practicing auditors can take to minimize their legal liability.

The standard of due care to which the auditor is expected to be held is referred to as the prudent person concept.

Three approaches to the application of the foreseen users' concept are (1)the Credit Alliance approach,(2)the restatement of torts approach,and (3)the foreseeable user approach.Summarize each of these three approaches.

An example of a breach of contract would likely include: