Chap 4 hw- audit

When damage to another is directly attributable to a wrongdoer's act, __________ is said to exist.

proximate cause

A document including audited financial statements that must be filed with the SEC by any company intending to sell its securities to the public through the mails or interstate commerce is called a __________.

registration statement

A __________ of financial statements involves the performance of limited investigative procedures that provide a basis for the expression of limited assurance that there are no material departures from generally accepted accounting principles.

review

When CPAs are associated with __________ financial statements, a possibility exists that the client may misinterpret the extent of the CPAs' services and believe that the accountants are acting as auditors.

unaudited

g. Under the Securities and Exchange Act of 1934, auditors and other defendants are generally faced with:

Proportionate liability.

Gross negligence is also referred to as __________.

constructive fraud

The __________ case was a landmark case regarding the accountant's liability for unaudited financial statements.

1136 Tenants' Corporation

d. If the CPAs provided negligent tax advice to a public company, the client would bring suit under:

Common law.

f. Under common law, the CPAs who were negligent may mitigate some damages to a client by proving:

Contributory negligence.

k. The most significant result of the Continental Vending case was that it:

Created a more general awareness of the possibility of auditor criminal prosecution.

e. Which of the following cases reaffirmed the principles in the Ultramares case?

Credit Alliance Corporation v. Arthur Andersen & Company

The __________ case, a landmark case of liability under the Securities Act of 1933, involved criticism of the auditors' review for subsequent events.

BarChris

Intent to deceive, manipulate, or defraud. This concept is used in the 1934 Securities Exchange Act to establish auditor liability.

Scienter

b. Which of the following approaches to auditors' liability is least desirable from the CPA's perspective?

The Rosenblum approach.

c. In cases of breach of contract, plaintiffs generally have to prove all of the following, except:

The CPAs made a false statement.

Unwritten law that has developed through court decisions is referred to as __________.

common law

Under the Securities Act of 1933, initial purchasers of securities may sue the auditors for misleading audited financial statements and need not prove that they relied on the financial statements. The burden of proof is on the auditors to prove that they were __________ in the performance of their work.

duly diligent

An __________ is the written contract summarizing the relationship between the auditors and the client.

engagement letter

a. If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for:

Gross negligence.

Failure of one or both parties to a contract to perform in accordance with the contract's provisions.

Breach of contract

Performing duties with such recklessness that persons believing the duties to have been completed carefully are being misled. The person performing the duties does not have knowledge of misrepresentations within the financial statements.

Constructive fraud

i. Which of the following elements is most frequently necessary to hold a CPA liable to a client?

Failed to exercise due care.

A method of allocating damages to each group that is liable according to that group's pro-rata share of any damages recovered by the plaintiff. For example, if the plaintiff was awarded a total of $500 thousand and the CPAs were found to bear 30 percent of the responsibility for the damages, the CPAs would be assessed $150 thousand.

Proportionate liability

Damage to another is directly attributable to a wrongdoer's act. This issue may be raised as a defense in litigation—that is, the defense may argue that some other factor caused the loss.

Proximate cause

h. 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?

The false statement is immaterial in the overall context of the financial statements.

j. Which statement best expresses the factors that purchasers of securities registered under the Securities Act of 1933 need to prove to recover losses from the auditors?

The purchasers of securities must prove that the financial statements were misleading; then, the burden of proof is shifted to the auditors to show that the audit was performed with "due diligence."

l. The 1136 Tenants' case was important because of its emphasis upon the legal liability of the CPA when associated with:

Unaudited financial statements.