Chapter 27
According to the Sarbanes-Oxley Act, any person who is employed by a public accounting firm that audits a client cannot be employed by that client as the chief executive officer (CEO), chief financial officer (CFO), controller, chief accounting officer, or equivalent position for a period of _____ year(s) following the audit. A. one This is the correct answer. B. three C. two D. five E. seven
A
In terms of membership on the Public Company Accounting Oversight Board (PCAOB), _____. A. two of the members must be CPAs, and three must not be CPAs This is the correct answer. B. three of the members must be CPAs, and two must not be CPAs C. three of the members must be CPAs, and two must be licensed attorneys D. none of the members can be CPAs E. two of the members must be CPAs, and three must be licensed attorneys
A
Section _____ of the _____ imposes civil liability on any person who makes false or misleading statements of material fact in any application, report, or document filed with the SEC. A. 18(a); Securities Exchange Act of 1934 This is the correct answer. B. 11(a); Securities Act of 1933 C. 12(b); Securities Exchange Act of 1934 D. 12(b); Securities Act of 1933 E. 10(b); Securities Exchange Act of 1934
A
The Tax Reform Act of 1976 imposes all EXCEPT which of the following penalties? A. strict liability for the understatement of a client's tax obligation This is the correct answer. B. fines and imprisonment for an individual for aiding and assisting in the preparation of a false tax return C. fines for the willful understatement of a client's tax liability D. fines for the negligent understatement of a client's tax liability E. fines for a corporation for aiding and assisting in the preparation of a false tax return
A
The terms of a(n) _____ are specified when an accountant and a client enter into a contract for the provision of accounting services by the accountant. A. engagement This is the correct answer. B. accord and satisfaction C. accounting D. disengagement E. novation
A
Under the Ultramares doctrine, a privity of contract (or privitydash-like) relationship exists ________________. A. when an accountant prepares financial statements to be used by a third party for a specific purpose This is the correct answer. B. never, as privity of contract can never occur with third parties C. when the accountant does not prepare financial statements D. any time an accountant prepares audited statements for a client E. when the accountant has no knowledge of third parties using their audited financial statements
A
Which of the following is true about accountant-client privilege? A. Sometimes clients of accountants are sued in court. This is the correct answer. B. About 30 states have enacted statues that create an accountantdash-client privilege. C. Accountant-client privilege means that an accountant can be called as a witness against a client in a court action. D. Very few states follow the common law, which provides that an accountant may be called to court to testify against his or her client. E. The U.S. Supreme Court has held that there is an accountantdash-client privilege under federal law
A
A(n) _____ opinion determines that the financial statements do not fairly represent the company's financial position, results of operations, or change in cash flows in conformity with GAAPs. A. adverse This is the correct answer. B. qualified C. unqualified D. concurring E. dissenting
A
_____ is a rule stating that an accountant is liable only for negligence to third parties who are in privity of contract or in a privity-like relationship with the accountant. A. The Ultramares doctrine This is the correct answer. B. The comparative negligence C. The foreseeability standard D. The strict liability standard E. Section 552 of the Restatement (Second) of Torts
A
_____ provides the broadest standard for holding accountants liable to third parties for negligence. A. The foreseeability standard This is the correct answer. B. The conjectural standard C. The Ultramares doctrine D. Section 552 of the Restatement of Contracts E. Section 552 of the Restatement (Second) of Torts
A
Section _____ of the _____ prohibits any manipulative or deceptive practice in connection with the purchase or sale of any security. A. 10(b); Securities Act of 1933 B. 10(b); Securities Exchange Act of 1934 This is the correct answer. C. 11(a); Securities Exchange Act of 1934 D. 11(a); Securities Act of 1933 E. 12(b); Securities Exchange Act of 1934
B
The U.S. Supreme Court has held that there is ________ accountantdash-client privilege under federal law. A. complete B. no This is the correct answer. C. some D. partial E. occasional
B
The United States Supreme Court has held that _______ of accountants and others violate(s) Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. A. intentional conduct and ordinary negligence, but not recklessness B. intentional conduct and recklessness, but not ordinary negligence This is the correct answer. C. only ordinary negligence D. only intentional conduct E. only recklessness
B
The majority of states have adopted which rule of liability in determining whether an accountant is liable in negligence to third parties? A. the strict liability standard B. Section 552 of the Restatement (Second) of Torts This is the correct answer. C. the Ultramares doctrine D. the comparative negligence doctrine E. the foreseeability standard
B
The rationale behind the Ultramares case was that ________. A. accountants should not be liable to third parties B. accountants should not be liable for an indeterminate amount for an indeterminate time to an indeterminate class This is the correct answer. C. accountants should only be liable to clients with whom they have a contract D. accountants' liability to third parties should be unlimited E. accountants should be liable to all who are harmed
B
Which of the following is NOT true regarding accounting malpractice (negligence)? A. Accountants owe a duty to use reasonable care, knowledge, skill, and judgement. B. An accountant is relieved of liability if he or she can prove they followed applicable GAAP, GAAS, and/or IFRS. This is the correct answer. C. Uniform accounting standards exist to prevent accounting malpractice. D. Violations of GAAP, GAAS, or IFRS, if applicable, are evidence of negligence. E. An accountant's actions are measured against those of a "reasonable accountant" in similar circumstances.
B
Which of the following is a major rule of liability that a state can adopt in determining whether an accountant is liable in negligence to third parties? A. the strict liability standard B. the Ultramares doctrine This is the correct answer. C. the absolute liability standard D. the comparative negligence doctrine E. the contributory negligence doctrine
B
Which of the following is an INCORRECT statement regarding the Sarbanes-Oxley Act? A. The act creates the Public Company Accounting Oversight Board (PCAOB). B. The act makes it possible for a registered public accounting firm to provide simultaneously audit and bookkeeping services to a public company. This is the correct answer. C. The act requires that public corporations have an audit committee that is composed of independent members of the board of directors. D. To audit a public company, a public accounting firm must register with the PCAOB. E. Any person who is employed by a public accounting firm that audits a client cannot be employed by that client as the chief executive officer (CEO), chief financial officer (CFO), controller, chief accounting officer, or equivalent position for a period of one year following the audit.
B
_____ fraud occurs when an accountant acts with "reckless disregard" for the truth or the consequences of his or her actions. This type of fraud is sometimes categorized as _____. A. Actual; absolute liability B. Constructive; gross negligence This is the correct answer. C. Constructive; strict liability D. Constructive; negligence per se E. Actual; ordinary negligence
B
_____ is a rule stating that an accountant is liable for negligence to third parties who are foreseeable users of the client's financial statements. It provides the broadest standard for holding accountants liable to third parties for negligence. A. Section 552 of the Restatement (Second) of Torts B. The foreseeability standard This is the correct answer. C. The strict liability standard D. The comparative negligence doctrine E. The Ultramares doctrine
B
__________________makes it a criminal offense for any person willfully and knowingly to make or cause to be made any false or misleading statement in any application, report, or other document required to be filed with the SEC pursuant to the Securities Exchange Act of 1934 or any rule or regulation adopted thereunder. A. Section 24 of the Securities Act of 1933 B. Section 32(a) of the Securities Exchange Act of 1934 This is the correct answer. C. Section 11(a) of the Securities Act of 1933 D. Section 10(b) of the Securities Exchange Act of 1934 E. Section 18(a) of the Securities Exchange Act of 1934
B
A breach of contract by an accountant occurs when the accountant ________. A. acts with reckless disregard for the truth or consequences of his or her actions B. violates GAAP C. fails to perform the terms of the engagement contract This is the correct answer. D. intentionally misrepresents a material fact upon which the client relies E. fails to investigate a suspicious entry during an audit
C
An actual fraud action can be brought against an accountant when the accountant ________. A. acts with reckless disregard for the truth or consequences of his or her actions B. fails to perform the terms of the engagement contract C. intentionally misrepresents a material fact upon which the client relies This is the correct answer. D. fails to investigate a suspicious entry during an audit E. violates GAAP
C
In Cast Art Industries, LLC v. KPMG LLP, the supreme court of New Jersey held that KPMG ________. A. was liable to Cast Art Industries because it was a foreseeable user of the client's financial statements B. was liable to Cast Art Industries because of privity of contract C. was not liable to Cast Art Industries because it was not foreseeable that its client would provide its financial statements to a potential purchaser of its client This is the correct answer. D. was not liable to Cast Art Industries because there was no privity of contract E. was liable for negligence because it knew its client would supply copies of the financial statements to Cast Art Industries in order to purchase the company
C
One of the goals of Sarbanes-Oxley is to _______. A. allow auditors to perform bookkeeping services for the same company B. punish Arthur Andersen Accounting management C. provide government oversight of accounting and audit services This is the correct answer. D. punish Enron executives E. maintain current financial reporting requirements
C
Which of the following correctly ranks the major rules of liability (Ultramares, Section 552, foreseeability standard) in order from least broad to broadest standard for holding accountants liable to third parties for negligence? A. Ultramares, foreseeability standard, Section 552 B. Section 552, Ultramares, foreseeability standard C. Ultramares, Section 552, foreseeability standard This is the correct answer. D. foreseeability standard, Section 552, Ultramares E. Section 552, foreseeability standard, Ultramares
C
Which of the following is NOT true regarding the criminal liability of accountants? A. Accountants who prepare tax returns can be held criminally liable for negligent understatements of a client's tax liability. B. Accountants can be named as defendants in lawsuits that assert violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). C. Securities laws are a federal creation. States do not enact their own securities laws. This is the correct answer. D. It is a criminal offense for a person to omit a material fact necessary in a registration statement to make it not misleading. E. A person can be imprisoned for violating Section 32(a) of the '34 Act.
C
Which of the following is NOT true regarding accountant-client privilege? A. Accountants can be called to testify against their own client in federal RICO cases. B. Most states provide that an accountant may be called to testify against their own client. C. Accountants cannot be called as a witness against a client in a court action. This is the correct answer. D. Only about 20 states recognize an accountant-client privilege. E. Accountant-client privilege does not exist under federal law.
C
Which of the following is a major rule of liability that a state can adopt in determining whether an accountant is liable in negligence to third parties? A. the strict liability standard B. the comparative negligence doctrine C. the foreseeability standard This is the correct answer. D. the contributory negligence doctrine E. the absolute liability standard
C
___________________ imposes civil liability on any person who makes false or misleading statements of material fact in any application, report, or document filed with the SEC. A. Section 32(a) of the Securities Exchange Act of 1934 B. Section 11(a) of the Securities Act of 1933 C. Section 18(a) of the Securities Exchange Act of 1934 This is the correct answer. D. Section 10(b) of the Securities Exchange Act of 1934 E. Section 24 of the Securities Act of 1933
C
A(n) _____ opinion represents an auditor's finding that the company's financial statements fairly represent the company's financial position, the results of its operations, and the change in cash flows for the period under audit, in conformity with generally accepted accounting principles (GAAPs). A. adverse B. unanimous C. qualified D. unqualified Your answer is correct. E. en banc
D
In the Ultramares case, the accountants issued ________. A. no opinion B. an adverse opinion C. an unqualified opinion Your answer is correct. D. a qualified opinion E. a disclaimer of opinion
c
According to _____, an accountant is liable only for negligence to third parties who are in privity of contract or in a privity-like relationship with the accountant. A. the foreseeability standard B. Section 552 of the Restatement of Torts C. Section 552 of the Restatement (Second) of Torts D. the Ultramares doctrine This is the correct answer. E. the conjectural standard
D
If a public accounting firm audits a public company, the accounting firm may provide ________ to the client, if preapproved by the audit committee of the company. A. internal audit services B. bookkeeping services C. financial information systems D. tax services This is the correct answer. E. appraisal or valuation services
D
In Ultramares Corporation v. Touche, the court held that ________. A. Ultramares was liable because there was no privity of contract with Touche B. Touche was liable because there was privity of contract with Ultramares C. Ultramares was liable for negligence D. Touche was not liable because there was no privity of contract with Ultramares This is the correct answer. E. Touche was liable for negligence
D
Under the Tax Reform Act of 1976, if an accountant commits wrongdoing in the preparation of federal tax returns, she may be subject to all of the following penalties EXCEPT? A. fines and imprisonment B. restriction from engaging in future tax preparation C. imprisonment D. prohibition from conducting any type of business activity in the future in the United States This is the correct answer. E. fines
D
What of the following is NOT a feature of the Sarbanes-Oxley Act? A. It makes it unlawful for a registered public accounting firm to provide simultaneous audit and certain non-audit services to a public company. B. It requires public accounting firms to register with the PCAOB. C. It requires an audit partner of an accounting firm to approve the audit report. D. It prohibits employees of an accounting firm from ever becoming CEO at one of their audit clients. This is the correct answer. E. It created the Public Company Accounting Oversight Board (PCAOB).
D
Which of the following is a major rule of liability that a state can adopt in determining whether an accountant is liable in negligence to third parties? A. the strict liability standard B. the absolute liability standard C. the contributory negligence doctrine D. Section 552 of the Restatement (Second) of Torts This is the correct answer. E. the comparative negligence doctrine
D
Which of the following is true about accountant-client privilege? A. Very few states follow the common law, which provides that an accountant may be called to court to testify against his or her client. B. About 30 states have enacted statues that create an accountantdash-client privilege. C. Accountant-client privilege means that an accountant can be called as a witness against a client in a court action. D. Sometimes clients of accountants are sued in court. This is the correct answer. E. The U.S. Supreme Court has held that there is an accountantdash-client privilege under federal law.
D
Which of the following is true about accountant-client privilege? A. Accountant-client privilege means that an accountant can be called as a witness against a client in a court action. B. Very few states follow the common law, which provides that an accountant may be called to court to testify against his or her client. C. The U.S. Supreme Court has held that there is an accountantdash-client privilege under federal law. D. Sometimes clients of accountants are sued in court. This is the correct answer. E. About 30 states have enacted statues that create an accountantdash-client privilege.
D
Which type of opinion is usually issued when an auditor determines that a company has materially misstated certain items on its financial statements? A. qualified B. concurring C. unqualified D. adverse This is the correct answer. E. dissenting
D
_____ can be defined as a verification of a company's books and records. A. Compliance B. Authentication C. Certification D. Audit This is the correct answer. E. Ratification
D
_____ is a rule stating that an accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client's financial statements. A. The foreseeability standard B. The comparative negligence doctrine C. The contributory negligence doctrine D. Section 552 of the Restatement (Second) of Torts This is the correct answer. E. The Ultramares doctrine
D
A constructive fraud action can be brought against an accountant when the accountant ________. A. intentionally misrepresents a material fact upon which the client relies B. fails to perform the terms of the engagement contract C. violates GAAP D. fails to investigate a suspicious entry during an audit E. acts with reckless disregard for the truth or consequences of his or her actions
E
According to the Sarbanes-Oxley Act, an audit committee ________. A. may not be outside directors B. may not appoint the auditors for the company C. is composed of internal and independent board members D. receives reasonable compensation for their services E. must have at least one member who is a financial expert
E
An accountant's work papers may be protected in some states under the _____________. A. attorney-client privilege B. hearsay rule C. parol evidence rule D. accountant-client privilege E. work product immunity
E
Section _____ of the _____ imposes civil liability on accountants and others for 1) making misstatements or omissions of material facts in a registration statement or 2) failing to find such misstatements or omissions. A. 12(b); Securities Exchange Act of 1934 B. 14(c); Securities Act of 1933 C. 11(a); Securities Exchange Act of 1934 D. 12(b); Securities Act of 1933 E. 11(a); Securities Act of 1933
E
Suppose that while conducting an audit, accountants fail to detect a fraud in the financial statements. The accountants' unqualified opinion is included in the registration statement and prospectus for the offering. The investor can sue the makers of the misrepresentation for _____ and the accountants for _____. A. strict liability; negligence B. fraud; absolute liability C. negligence; fraud D. negligence; strict liability E. fraud; negligence
E
Victims of a securities fraud perpetrated by a firm suffer $1 million in damages. The accountants for the firm are found to be 10 percent liable, although they did not knowingly participate in the fraud. What amount, if any, would the accountants owe to the plaintiffs? A. nothing; they would only be held liable if they knowingly participated in the fraud B. $1 million; accountants can always be held liable for the full amount C. nothing; accountants are never liable for any damages caused by fraud perpetrated by a client D. $500,000; the accountants owe half of any damages caused by their client E. $100,000; accountants are liable to their proportionate degree of fault
E
Which of the following is NOT true about accountant's work papers? A. These papers often include plans for conducting audits, work assignments, notes regarding the collection of data, evidence about the testing of accounts, notes concerning the client's internal controls, notes reconciling the accountant's report and the client's records, research, comments, memorandums, explanations, opinions, and information regarding the affairs of the client. B. There are some states that provide work product immunity, which means an accountant's work papers cannot be discovered in a court case against the accountant's client. C. Accountants often generate substantial internal work papers as they perform their services. D. Most states do not provide work product immunity, and an accountant's work papers can be discovered. E. Federal law does not allow for discovery of an accountant's work papers in a federal case against the accountant's client.
E
Which of the following statements about the Public Company Accounting Oversight Board (PCAOB) is true? A. Three of its members must be CPAs. B. The President has oversight and enforcement authority over the board. C. Two of its members must not be CPAs. D. The PCAOB consists of five financially literate members who are appointed by the SEC for two-year terms. E. The board has the authority to adopt rules concerning auditing, accounting quality control, independence, and ethics of public companies and public accountants
E
A(n) _____ of opinion expresses the auditor's inability to draw a conclusion about the accuracy of the company's financial records. A. stalemate B. reservation C. detente D. impasse E. disclaime
E
_________________ prohibits any manipulative or deceptive practice in connection with the purchase or sale of any security. A. Section 24 of the Securities Act of 1933 B. Section 18(a) of the Securities Exchange Act of 1934 C. Section 11(a) of the Securities Act of 1933 D. Section 32(a) of the Securities Exchange Act of 1934 E. Section 10(b) of the Securities Exchange Act of 1934
E
___________________ imposes civil liability on accountants and others for (1) making misstatements or omissions of material facts in a registration statement or (2) failing to find such misstatements or omissions. A. Section 10(b) of the Securities Exchange Act of 1934 B. Section 18(a) of the Securities Exchange Act of 1934 C. Section 32(a) of the Securities Exchange Act of 1934 D. Section 24 of the Securities Act of 1933 E. Section 11(a) of the Securities Act of 1933
E
The terms of a(n) _____ are specified when an accountant and a client enter into a contract for the provisions of accounting services by the accountant. A. delegation B. engagement Your answer is correct. C. license D. assignment E. employment agreement
b
Which of the following is NOT true about the Section 32(a) of the Securities Exchange Act of 1934? A. Because accountants often file reports and documents with the SEC on behalf of clients, they are subject to Section 32(a). B. Insider trading falls outside the parameters of Section 32(a). This is the correct answer. C. On conviction under Section 32(a), an individual may be fined, imprisoned, or both. D. Section 32(a) of the Securities Exchange Act of 1934 makes it a criminal offense for any person willfully and knowingly to make or cause to be made any false or misleading statement in any application, report, or other document required to be filed with the SEC pursuant to the Securities Exchange Act of 1934 or any rule or regulation adopted thereunder. E. A person cannot be imprisoned under Section 32(a) unless he or she had knowledge of the rule or regulation violated.
b
__________________makes it a criminal offense for any person willfully and knowingly to make or cause to be made any false or misleading statement in any application, report, or other document required to be filed with the SEC pursuant to the Securities Exchange Act of 1934 or any rule or regulation adopted thereunder. A. Section 24 of the Securities Act of 1933 B. Section 32(a) of the Securities Exchange Act of 1934 This is the correct answer. C. Section 11(a) of the Securities Act of 1933 D. Section 10(b) of the Securities Exchange Act of 1934 E. Section 18(a) of the Securities Exchange Act of 1934
b
A(n) _____ opinion states that the financial statements are fairly represented except for, or subject to, a departure from GAAPs, a change in accounting principles, or a material uncertainty. A. unqualified B. dissenting C. concurring D. qualified Your answer is correct. E. adverse
d
