Question 1

The Securities Exchange Act of 1934 offers recourse against the auditors to a far greater number of investors than does the Securities Act of 1933.

Accepted Answer

A) True 
 B)False

Question 2

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?

Accepted Answer

A)  The CPA is liable only to third parties in privity of contract with the CPA. 
B)  The CPA is liable only to known users of the financial statements. 
C)  The CPA probably is liable to any person who suffered a loss as a result of the fraud. 
D)  The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

Question 3

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.

Question 4

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 5

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 6

Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?

Accepted Answer

A)  Ultramares v. Touche. 
B)  Restatement of Torts. 
C)  Rule 10b-5. 
D)  Rosenblum v. Adler.

Question 7

The Securities Act of 1934 includes provisions for criminal charges against persons violating the Act.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence?

Accepted Answer

A)  A loss sustained by a client in a suit brought under common law. 
B)  A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent. 
C)  A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933. 
D)  A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

In which type of court case is proving "due diligence" essential to the auditors' defense?

Accepted Answer

A)  Court cases brought under the Securities Exchange Act of 1934. 
B)  Court cases brought by clients under common law. 
C)  Court cases brought by third parties under common law. 
D)  Court cases brought under the Securities Act of 1933.

Question 13

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 14

A CPA firm has audited the financial statements included in a Form S-1 filed with the SEC under the Securities Act of 1933. Shortly thereafter, the company went bankrupt and a class action lawsuit was filed by the initial investors against the CPA firm.
a. What should the plaintiff investors attempt to prove?
b. Must the plaintiffs prove that they relied on the financial statements included in the Form S-1?
c. What must the CPA firm prove in order to be successful with respect to the firm's defense? a. The plaintiff investors should attempt to prove:
• That they sustained losses, and
• That the financial statements were misleading.
b. No. The investors need not prove reliance.
c. The audit firm must prove:

Accepted Answer

The answer of A CPA firm has audited the financial...

Question 15

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 16

A CPA's duty of due care to a client most likely will be breached when a CPA:

Accepted Answer

A)  Gives a client an oral report instead of a written report. 
B)  Gives a client incorrect advice based on an honest error of judgment. 
C)  Fails to give tax advice that saves the client money. 
D)  Fails to follow generally accepted auditing standards.

Question 17

Fraud is defined as failure to use reasonable care in the performance of services.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

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 20

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.

Exam 4: Legal Liability of Cpas

The Securities Exchange Act of 1934 offers recourse against the auditors to a far greater number of investors than does the Securities Act of 1933.

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?

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:

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

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

Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?

The Securities Act of 1934 includes provisions for criminal charges against persons violating the Act.

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?

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:

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence?

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

In which type of court case is proving "due diligence" essential to the auditors' defense?

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

A CPA's duty of due care to a client most likely will be breached when a CPA:

Fraud is defined as failure to use reasonable care in the performance of services.

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