Question 1

Which of the following is a correct statement related to CPA legal liability under common law?

Accepted Answer

A) CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. 
B) CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed. 
C) CPAs may escape all personal liability through incorporation as a limited liability corporation. 
D) CPAs are guilty until they prove that they performed the audit with "good faith."

Question 2

The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of: $\begin{array} { c } 
&\text { Registered Public } & \text { Registered Public } \
&\text { Accounting Firms } & \text {  Accounting Firm Employees } \
 \text { A) } & \text { Yes } & \text { Yes } \ \text { B) } & \text { Yes } & \text { No } \ \text { C) } & \text { No } & \text { Yes } \ \text { D) } & \text { No } & \text { No } 
\end{array}$

Accepted Answer

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

Question 3

Assume that a client has encountered a $500,000 fraud and that the CPA's percentage of responsibility established at 10%,while the company itself was responsible for the other 90%.Under which approach to liability is the CPA most likely to avoid liability entirely?

Accepted Answer

A) Absolute negligence. 
B) Comparative negligence. 
C) Contributory negligence. 
D) Joint Negligence.

Question 4

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 misstatement is immaterial in the overall context of the financial statements.

Question 5

Under the Ultramares rule,to which of the following parties will an accountant be liable for ordinary negligence? $$\begin{array} {c} 
& \text { Parties in privity} & \text { Foreseen parties} \
\text { A) } & \text { Yes } & \text { Yes } \
\text { B) } & \text { Yes } & \text { No } \
\text { C) } & \text { No } & \text { Yes } \
\text { D) } & \text { No } & \text { No }
\end{array}$$

Accepted Answer

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

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Hark,CPA,negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements.Long's president told Hark that the audited financial statements would be submitted to several,at this point undetermined,banks to obtain financing.Relying on the statements,Third Bank gave Long a loan.Long defaulted on the loan.In jurisdiction applying the Ultramares decision,if Third sues Hark,Hark will:

Accepted Answer

A) Win because there was no privity of contract between Hark and Third. 
B) Lose because Hark knew that a bank would be relaying the financial statements. 
C) Win because Third was contributory negligent in granting the loan. 
D) Lose because Hark was negligent in performing the audit.

Question 8

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 9

A plaintiff may elect to bring a lawsuit against auditors under applicable statutes-including the Securities Act of 1933 and the Securities Exchange Act of 1934-and under common law.For each circumstance,indicate the most likely source of CPA liability by placing the appropriate letter in the third column.
a.The Securities Act of 1933
b.The Securities Exchange Act of 1934
c.Common Law
 $\begin{array}{c}
&&&&&&&&&Circumstance &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& Source of Liability
\end{array}$
1. A CPA's client is filing suit for negligenee in performing an audit.
2. A stockholder of a publicly-held company who purchased the stock from another investor is filing suit for losses sustained on the stock.
3. A bank that lent money to a company is filing suit for misleading financial statements that were audited by the CPA.
4. An investor is filing suit for losses sustained in the purchase of publicly-traded bonds that were bought from the company upon initial registration.
5. A stockholder who purchased stock of a public company in an initial public offering is filing a suit for losses sustained in the purchase of the stock.
6. A CPA's client is filing suit for losses sustained for errors in a tax return prepared by the CPA.
7. A supplier who provided eredit to the CPA's publicly held elient is filing suit for losses sustained when the client could not pay the account.
8. An investor who purchased a corporate bond from another investor on the New York Stock Exchange is filing suit to recover losses.

Accepted Answer

The answer of A plaintiff may elect to bring a...

Question 10

The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors.

Accepted Answer

A) True 
 B)False

Question 11

Under common law,when performing an audit,a CPA:

Accepted Answer

A) Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. 
B) Must strictly adhere to generally accepted accounting principles. 
C) Is strictly liable for failures to discover client fraud. 
D) Is not liable unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards.

Question 12

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 13

Assume that $500,000 in damages are awarded to a plaintiff,and the CPA's percentage of responsibility established at 10%,while others are responsible for the other 90%.Assume the others have no financial resources.The CPA has been required to pay $50,000.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 14

Auditors may be held liable to both their clients and third parties under common law.
a.What must a client prove to recover its losses from the auditors under common law?
b.In a court that adheres to the precedent set by the Ultramares v.Touche case what must an ordinary third party prove to recover losses from the auditors under common law?

Accepted Answer

The answer of Auditors may be held liable to both...

Question 15

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 16

The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be:

Accepted Answer

A) Less than the Securities Act of 1933. 
B) The same as the Securities Act of 1933. 
C) Greater than the Securities Act of 1933. 
D) Indeterminate in relation to the Securities Act of 1933.

Exam 4: Legal Liability of CPAS