Auditing Test 2

Under the 1933 Act, the plaintiff (the security purchaser) needs to prove that the auditor acted in negligence.

False, sustained a loss and registration statement was misleading

Ultramares v. Touche & Co. was a case that rejected the approaches arising out of Rosenblum v. Adler and established a very different standard.

False, the reverse

The initial and subsequent purchasers of a security offered for sale are covered for liability by the: 1933 Act or 1934 Act or Sarbanes-Oxley Act or RICO Act or none of these

1934 act

A statutory law approach to assigning liability to CPAs for third parties are

RICO & Securities Acts

Describe the three parts of the code?

1. Principles: statements on profession responsibility 2.rules:requirements 3.interpretations:guide on scope and application of rules

What are 3 areas of safeguards?

1. Profession: rules & regulations 2. Client management 3.CPA firm

4 Elements for a client to establish a breach of contract or negligence claim on a cpa

1.causation 2.damage or injury 3.duty 4.breach of duty

4 elements of fraud

1.false 2.material item 3.intent 4.damage

Third party common law 4 issues for lawsuit

1.reliance 2.loss 3.loss was due to CPA 4.CPA breached a duty of due professional care

The initial purchasers of a security offered for sale under a registration statement are covered for liability by the: 1933 Act or 1934 Act or Sarbanes-Oxley Act or Foreign Corrupt Practices Act or none of these

1933 Act

The Securities Acts of ________ and _________ differ in investors protected and the burden of proof required.

1933 and 1934

Threats to independence need to be eliminated or reduced to an acceptable level for AICPA Code of Conduct "members in business" section.

False, members in public practice, no independence requirement for business

The plaintiff needs to prove causation to recover under the 1934 Act.

False, needs to prove they sustained losses, fin stmts were misleading, and they relied upon fin stmts

Who is allowed to decide if threats to noncompliance with the Code are eliminated or reduced to an acceptable level?

CPA & CPA firm

Ethical dilemmas rarely affect the welfare of a large number of individuals within an organization.

False, often affect a large number

The profession considers independence to have the three parts of: independence of mind/fact, appearance, and promotion.

False, only independence of mind/fact, appearance

Develops through case decisions generally arising due to breach of contract, negligence, and fraud

Common law

What is the difference between a direct and an indirect financial interest?

Direct: bought shares Indirect:dad owns shares

In order to establish CPA liability, a client must prove what four elements?

Duty, breach of duty, losses, causation

What is the written contract summarizing the contractual relationship between the CPAs and the client?

Engagement letter

The CPA would rather be held for a third party liability under the 1933 Act versus the 1934 Act.

False

A statutory law approach to assigning liability to CPAs by third parties is the Sarbanes-Oxley Act.

False, RICO and Securities and Exchange Acts

Auditors perform an M-2 review to evaluate evidence arising between the completed audit date and effective date of a registration statement for misleading information in the registration.

False, S-1 review

Establishing that a CPA took due professional care will not limit the legal liability of the CPA.

False, a main defense is due professional care

An auditor of a nonpublic farming cooperation that identifies a fraud must report the fraud to outside parties such as the police.

False, bc nonpublic CPA has no obligation to police just the SEC

A statutory law approach to assigning liability to CPAs for third parties is the Ultramares approach.

False, common law

If a partner or professional employee of a CPA firm is simultaneously associated with the CPA firm and the client, CPA firm independence is not impaired.

False, firm independence is impaired

Communication between CPAs and their clients is privileged similar to attorney privilege.

False, have to turn information over

Scienter is the intent to correct, reform, or improve.

False, intent to decieve,manipulate, or defraud

Explain proportionate liability per the 1934 Act.

If one or more of the defendants are not able to pay their share of the losses, the auditors will have unlimited joint and several liability only to certain small investors. To other investors, the auditor's liability for losses caused by other parties is limited to an amount not to exceed 50% of the auditors proportionate share of the losses.

What are the two major types of constraints on decisions that involve ethical issues?

Internal and external standards

How does the SEC regulate auditors who appear and practice before the commission?

PCAOB

. A ___________________ is a swindle in which a quick return on an initial investment is paid out of funds of new investors to lure the victims into bigger risks.

Ponzi Scheme

Which type of liability allocates damages to each group that is liable according to that group's pro rata share of any damages recovered by the plaintiff?

Proportionate liability

when a governmental unit passes laws & regulations that either implicitly or explicitly impose potential liability upon CPAs

Statutory law

What board establishes international ethical standards for accountants?

The international ethic standards boards

A CPA may have legal liability through which of the following: breach of contract or gross negligence or fraud or statutory liability or none of these or all of these

all of these

Explain why the potential liability of auditors for professional "malpractice" exceeds that of physicians or other professionals

because the number of parties suffering significant losses is greater

. A relationship or circumstance that could cause non-compliance with the Code or impair independence is called a: ____________________________.

Threat

. Fraud is best defined as misrepresentation by a person of a material fact with the intention of deceiving the other party and with the result that the other party is injured.

True

A CPA in public practice may advertise their services.

True

A member in the "public practice" can be allowed to receive a contingent fee.

True

All direct and material indirect financial interests of covered members are prohibited.

True

An audit firm staff accountant working on an attest engagement would be considered a covered member.

True

CPAs must never subordinate their professional judgment to others.

True

Compilation and review of financial statements require exercise of due care by CPAs.

True

Independence must be evaluated at the individual CPA level and the CPA firm level.

True

Independence rules must be observed when performing attest services.

True

It is considered an act discreditable to knowingly disclose Uniform CPA exam questions or answers.

True

Negligence is a violation of a legal duty to exercise a degree of care that an ordinary prudent person would exercise under similar circumstances.

True

Safeguards are client management controls that can mitigate or eliminate threats to independence.

True

Safeguards are controls that mitigate or eliminate threats to independence.

True

The 1933 Act and 1934 Act allow for criminal charges against an auditor.

True

The Code of Professional Conduct consists of principles, rules, and interpretations.

True

The role of the independent auditor is to ensure that information is fair to all parties and not biased to benefit one group at the expense of another.

True

Under the 1934 Act section 10b, the plaintiff (the security purchaser) needs to prove that the auditor acted with scienter.

True

Under the 1934 Act section 18, the auditor needs to prove a good faith effort was taken in the audit to avoid liability.

True

A negligence charge can be brought by a client and a third party.

True, a third party must have suffered a loss

Every engagement should be approached with the prospect of being required to defend the work in court.

True, adequate planning

Under the 1933 Act, the auditor can defend them self by establishing the audit was conducted with due diligence.

True, and that losses weren't caused by mistated fin stmts, plaintiff knew of misstatements when securities were purchased, and statute of limitations had expired

An audit firm may provide the nonattest service of tax return preparation for a nonpublic company audit client.

True, can do anything outside of management responsibilities

An audit firm may provide the nonattest service of tax return preparation for a public company audit client.

True, can't do an individuals just the companys

Causation is a required element for a client to establish a breach of contract or negligence claim on a CPA.

True, intentional cause

The CPA would rather be held to gross negligence for liability while a third party would prefer the CPA held to ordinary negligence for common law liability.

True, probs didn't actually meet requirements for gross negligence

Statutory law is created by federal legislative bodies.

True, state law can also create

3 differences in liability to third parties

Ultamares (known user): auditors knew financial statements were for use for a particular purpose by a known user Restatement approach (foreseen user): knew financial statements were for particular purpose but didn't necessarily know the specific user Rosenblum approach (foreseeable user): the auditor should have realized that it was reasonably foreseeable that the financial statements would be used by this user

What is comparative negligence?

a concept used by certain courts to allocate damages between negligent parties based on the degree to which each party is at fault

In what organizational forms may CPAs practice public accounting?

any legal business form

To an audit firm, what would impaired independence toward a client/potential client mean or imply?

can't do the audit

. ___________ ____________ liability develops through case decisions.

common law

An individual, firm or entity that is capable of influencing an attest engagement, on engagement team, partner in some office, and more than 10 hours worth of nonattest work

covered member

Under Securities act who has the burden of proof

defendant (CPA)

What term refers to the preparation of financial statements based upon information provided to the CPAs by the client?

financial compliation

The type of independence involving a state of mind that permits the CPA to perform an attest service without being affected by influences that might compromise professional judgment is _____________.

independence of mind

The two types of independence acknowledged by the public accounting profession are _____________ and _____________.

independence of mind/fact, independence of appearance

What is the outcome of the Ultramares v. Touche & Co. case?

it established that auditors could be held liable to third-party beneficiaries for ordinary negligence and to other third parties for gross negligence.

Who is the code of professional conduct addressed to?

members in public, business, and other members

Which of the following characteristics regarding professional ethics is not required among recognized professions?

need for public uncertainty

Under common law who has the burden of proof

plaintiff

The general standards require a CPA to undertake only those professional services that the member or member's firm can reasonably expect to be completed with ________ __________. professional competence or due care or planning & data or all of these or none of these

professional competence

The criteria established in accounting standards to determine the ability of an investor to exercise significant influence over another entity

significant influence

What is meant when an audit is conducted with due diligence?

that the audit work was adequate to support its opinion on financial statements

When a threat exists, its significance should be evaluated to determine whether an _________ level of risk of noncompliance with the Code exists.

unacceptable