Chapter 4 Connect HW and MC

In cases of breach of contract, plaintiffs generally have to prove all of the following, except: 1. The CPAs had a duty. 2. The CPAs made a false statement. 3. The client incurred losses related to the CPAs' performance. 4. The CPAs breached their duty.

2. The CPAs made a false statement.

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the Restatement of Torts approach to liability, the auditor is generally liable to the bank which subsequently grants the loan for: Lack of due diligence. Lack of good faith. Gross negligence, but not ordinary negligence. Either ordinary or gross negligence.

Either ordinary or gross negligence.

Under the Ultramares rule, to which of the following parties will an accountant be liable for ordinary negligence? Parties in privity Foreseen parties A. Yes Yes B. Yes No C. No Yes D. No No Option A Option B Option C Option D

Option B

Under the Securities Act of 1933, the burden of proof that the plaintiff sustained a loss must be proven by the: Plaintiff. Defendant. SEC. Jury.

Plaintiff

Under common law, the CPAs who were negligent may mitigate some damages to a client by proving: a. Contributory negligence. b. The CPAs' fee was not material. c. The CPAs were not competent to accept the engagement. d. The CPAs' negligence was caused by the fact that they had too much work.

a. Contributory negligence

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

a. Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances.

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: 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.

a. Win because there was no privity of contract between Hark and Third.

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: a. Strict liability for all damages incurred. b. Gross negligence. c. Either ordinary or gross negligence. d. Breach of contract.

b. Gross negligence

g. Under the Securities and Exchange Act of 1934, auditors and other defendants are faced with: a. Joint liability. b. Joint and several liability. c. Proportionate liability. d. Limited liability.

c. Proportionate liability.

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? 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.

c. The CPA probably is liable to any person who suffered a loss as a result of the fraud.

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? a. The purchasers of securities must prove ordinary negligence by the auditors and reliance on the audited financial statements. b. The purchasers of securities must prove that the financial statements were misleading and that they relied on them to purchase the securities. c. 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." d. The purchasers of securities must prove that the financial statements were misleading and the auditors were negligent.

c. 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."

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 company's 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 be liable for all losses attributable to their negligence. b. They would have no liability because privity is lacking. c. They would have no liability, since the ordinary examination cannot be relied upon to detect fraud. d. They would be liable only if it could be proven that they were grossly negligent.

a. they would be liable for all losses attributable to their negligence.

Which of the following elements is most frequently necessary to hold a CPA liable to a client? a. Acted with scienter or guilty knowledge. b. Was not independent of the client. c. Failed to exercise due care. d. Did not use an engagement letter.

c. Failed to exercise due care.

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? 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.

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.

Which of the following is a correct statement related to CPA legal liability under common law? a. CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. b. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed. c. CPAs may escape all personal liability through incorporation as a limited liability corporation. d. CPAs are guilty until they prove that they performed the audit with "good faith."

b. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.

Reliance on the document. a. Only applies to Section 11 of the 1933 Securities Act. b. Only applies to Section 10(b) of the Securities Exchange Act. c. Applies to both acts. d. Applies to neither of the acts.

b. Only applies to Section 10(b) of the Securities

The CPA had scienter. 1. Only applies to Section 11 of the 1933 Securities Act. 2. Only applies to Section 10(b) of the Securities Exchange Act. 3. Applies to both acts. 4. Applies to neither of the acts.

b. Only applies to Section 10(b) of the Securities Exchange Act.

Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that: a. There was fraudulent activity by Worth. b. There was a material misstatement in the financial statements. c. Quincy relied on Worth's opinion. d. Quincy was in privity with Worth.

b. There was a material misstatement in the financial statements.

Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general, Jones will have to prove that: a. He is not guilty of gross negligence. b. He performed the audit with good faith. c. He performed the audit with due diligence. d. The plaintiffs did not show him to be negligent.

c. He performed the audit with due diligence.

Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $500,000. The auditor's liability is most likely based upon which approach to assessing liability? a. Absolute liability. b. Contributory negligence. c. Joint and several liability. d. Proportional liability.

c. Joint and several liability.

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.

Lack of due diligence by the CPA. a. Only applies to Section 11 of the 1933 Securities Act. b. Only applies to Section 10(b) of the Securities Exchange Act. c. Applies to both acts. d. Applies to neither of the acts.

d. Applies to neither of the acts.

Privity with the CPA. a. Only applies to Section 11 of the 1933 Securities Act. b. Only applies to Section 10(b) of the Securities Exchange Act. c. Applies to both acts. d. Applies to neither of the acts.

d. Applies to neither of the acts.

If the CPAs provided negligent tax advice to a public company, the client would bring suit under: a. The Securities Act of 1933. b. The Securities Exchange Act of 1934. c. the federal income tax law. d. Common law.

d. Common law.

Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party? a. Due Diligence Approach. b.Ultramares Approach. c. Restatement of Torts Approach. d. Rosenblum Approach.

d. Rosenblum Approach.

Under the 1934 Securities Exchange Act auditors are liable to ordinary trade creditors for the: a. lack of due diligence. b. lack of good faith. c. existence of gross negligence d. existence of scienter.

d. existence of scienter.

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? a. The investor has not proved fraud or negligence by the CPA. b. The investor did not actually rely upon the false statement. c. The CPA detected the false statement after the audit date. d. the false statement is immaterial in the overall context of the financial statements.

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

A monetary loss occurred. a. Only applies to Section 11 of the 1933 Securities Act. b. Only applies to Section 10(b) of the Securities Exchange Act. c. Applies to both acts. d. Applies to neither of the acts.

c. Applies to both acts.

Material misstatements were included in a filed document. a. Only applies to Section 11 of the 1933 Securities Act. b. Only applies to Section 10(b) of the Securities Exchange Act. c. Applies to both acts. d. Applies to neither of the acts.

c. Applies to both acts.

Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover certain instances of fraud which have subsequently caused Starr to suffer substantial losses. In order for Cox to be liable under common law, Starr, at a minimum, must prove that Cox: a. Acted recklessly or with lack of reasonable grounds for belief. b. Knew of the instances of fraud. c. Failed to exercise due care. d. Was grossly negligent.

Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover certain instances of fraud which have subsequently caused Starr to suffer substantial losses. In order for Cox to be liable under common law, Starr, at a minimum, must prove that Cox: Acted recklessly or with lack of reasonable grounds for belief. Knew of the instances of fraud. Failed to exercise due care. Was grossly negligent.

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

b. when such failure clearly results from failure to comply with generally accepted auditing standards.

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. Absolute negligence. b. Comparative negligence. c. Contributory negligence. d. Joint Negligence.

c. Contributory negligence.