Auditing Ch 4 Multiple Choice

I the event that a CPA issues an unqualified audit report on financial statements which he or she knows to be misleading, that CPA is: A) subject to criminal as well as civil liability B) subject to civil liability C) not subject to liability if the client also knows the financial statements to be misleading D) not subject to liability if he performed no audit procedures relating to the misleading portions of the statement

A) subject to criminal as well as civil liability

According to Statements on Auditing Standards, the auditor's responsibility to detect fraud arises: A) when such failure clearly results from failure to comply with generally accepted auditing standards B) whenever the amounts involved are material C) only when the examination was specifically designed to detect fraud D) only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor

A) when such failure clearly results from failure to comply with generally accepted auditing standard

The Securities Act of 1934 applies to: A) all for-profit business corporations within the United States B) all companies under the jurisdiction of the SEC C) all companies within the United States with $1 million or more total assets D) all companies within the United States with $10 million or more total assets and five or more shareholders

B) all companies under the jurisdiction of the SEC

Valid statements concerning gross negligence include all but which of the following? A) gross negligence is the lack of even slight care B) gross negligence may be viewed as "failure to exercise due professional care." C) gross negligence is indicative of a reckless disregard for one's professional responsibilities D) substantial failures to comply with the generally accepted auditing standards might be interpreted as gross negligence

B) gross negligence may be viewed as "failure to exercise due professional care."

According to court decisions, the generally accepted auditing standards established by the AICPA apply: A) only to the AICPA membership B) to all CPAs in public practice C) only to those who choose to follow them D) only when conducting audits subject to AICPA jurisdiction

B) to all CPAs in public practice

The 1136 Tenants Association case was chiefly important because of its emphasis upon the legal liability of the CPA when associated with: A) a review on interim statements B) unaudited financial statements C) an audit resulting in a disclaimer of opinion D) letters for underwriters

B) unaudited financial statements

Lessons to be learned from the 1136 Tenants Corporation case include all but which of the following? A) A CPA firm should never imply that it acted as an independent auditor unless it complied with GAAS B) Engagement letters are essential for accounting and review services C) Oral arrangements are necessary for supplementing items set forth in the engagement letter D) A CPA engaged to perform accounting or review services should follow up on unusual items such as missing invoices

C) Oral arrangements are necessary for supplementing items set forth in the engagement letter

Under common law, auditors are generally liable to the client for: A) lack of due diligence B) ordinary negligence, but not gross negligence C) ordinary negligence or gross negligence D) gross negligence, but not ordinary negligence

C) ordinary negligence or gross negligence

For a CPA firm considering the acceptance of new clients, which of the following characteristics would be a deterrent? A) the prospective client is long established but has shown little growth in recent years B) the prospective client is in the same line of business as two and is in direct competition with one of them C) the prospective client is in a new much-publicized industry offering the possibility of rapid growth but is under financed and possibly on the brink of bankruptcy D) the prospective client is a defendant in an antitrust suit brought by the U.S. Department of Justice

C) the prospective client is in a new much-publicized industry offering the possibility of rapid growth but is under financed and possibly on the brink of bankruptcy

Under the 1934 Securities Exchange Act auditors are liable to ordinary trade creditors for: A) lack of due diligence B) lack of good faith C) gross negligence D) none of the above

D) none of the above

In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the: A) auditor's agreement in the use of this defense B) common law C) AICPA Code of Professional Conduct D) state law

D) state law

As a consequence of their failure to adhere to generally accepted auditing standards in the course of their audit of Frost Corp., Jones & Telling, CPAs, did not detect the embezzlement of a material amount of money by the companies controller. As a matter of common law, to what extent would the CPAs be liable to Frost Corp. for losses attributable to the theft? A) they would have no liability, since the ordinary examination cannot be relied upon to detect fraud B) they would have no liability because privity is lacking C) they would be liable only if it could be proven that they were grossly negligent D) they would be liable for all losses attributable to their negligence

D) they would be liable for all losses attributable to their negligence