audit quiz #4
A bank loses money that it loaned to an issuer in reliance upon financial statements filed with the SEC. Which law applies? Common law The Securities Act of 1933 The Securities Exchange Act of 1934
Common law
If the CPAs provided negligent tax advice to a public company, the client would bring suit under: The Securities Act of 1933. The Securities Exchange Act of 1934. The federal income tax law. Common law.
Common law.
Under common law, the CPAs who were negligent may mitigate some damages to a client by proving: Contributory negligence. The CPAs' fee was not material. The CPAs were not competent to accept the engagement. The CPAs' negligence was caused by the fact that they had too much work.
Contributory negligence.
Audits are not designed to detect fraud, and auditors are never liable for losses to clients resulting from undetected fraud.
F
CPAs who are found negligent will not be able to recover on a liability insurance policy covering the practice of public accounting. TF?
F
Compilations prepared by CPAs are intended to provide interested parties with a limited degree of assurance regarding the fairness of the financial statements.
F
Due adequate care is a complete defense against a charge of negligence on the part of the auditors.
F
If the auditors are competent and thorough, there will be no possibility of audited financial statements being misleading.
F
In the Rosenblum v. Adler case, the state supreme court ruled that auditors could not be held liable to unidentified third parties for ordinary negligence.
F
The Securities Act of 1933 requires the auditors to prove that they acted in "good faith," whereas the Securities Exchange Act of 1934 requires the auditors to prove "due diligence" to protect themselves from legal liability.
F
The auditors will always be considered to be negligent if material misstatements in audited financial statements due to errors or fraud go undetected.
F
Under both common law and statutory law, CPA liability may arise from improper performance of audits or tax services, but not consulting services.
F
Which of the following elements is most frequently necessary to hold a CPA liable to a client? Acted with scienter or guilty knowledge. Was not independent of the client. Failed to exercise due care. Did not use an engagement letter.
Failed to exercise due care.
Lessons to be learned from the 1136 Tenants' Corporation case include all but which of the following? A CPA firm should never imply that it acted as an independent auditor unless it complied with GAAS. Engagement letters are essential for accounting and review services. Oral arrangements are necessary for supplementing items set forth in the engagement letter. A CPA engaged to perform accounting or review services should follow up on unusual items such as missing invoices.
Oral arrangements are necessary for supplementing items set forth in the engagement letter.
Under the Securities Exchange Act of 1934, auditors and other defendants are faced with: Joint liability. Joint and several liability. Proportionate liability. Limited liability.
Proportionate liability.
A violation of the AICPA Code of Professional Conduct may result in the CPA being found legally negligent. TF?
T
Assuming that a registration statement omits a material fact and that the auditors were negligent, they can reduce their liability to initial investors if the auditors can demonstrate that the investors' losses were caused partially by other factors.
T
CPAs are not liable to any party if they can successfully prove that they performed their services with due professional care.
T
CPAs may be held liable for losses sustained because of their association with compiled or reviewed financial statements.
T
In the Continental Vending case there was no proven intent to defraud on the part of the CPAs; they were convicted of criminal fraud on the basis of gross negligence.
T
In cases of breach of contract, plaintiffs generally have to prove all of the following, except: The CPAs had a duty. The CPAs made a false statement. The client incurred losses related to the CPAs' performance. The CPAs breached their duty.
The CPAs made a false statement.
The Rosenblum approach.
The Rosenblum Approach provides more third parties the ability to recover damages from the CPA who has performed an engagement with ordinary negligence, and accordingly, is least desirable from the perspective of the CPA. The Ultramares Approach is most desirable, and the Restatement Approach (also known as the Foreseen User Approach) is between the two extremes.
A CPA is criminally prosecuted for gross negligence in auditing financial statements contained in a registration statement. Which law applies? Common law The Securities Act of 1933 The Securities Exchange Act of 1934
The Securities Act of 1933
An initial purchaser of bonds of an issuer sustains a loss in reliance upon the CPA for his audit work relating to financial statements used to register the securities for sale. Which law applies? Common law The Securities Act of 1933 The Securities Exchange Act of 1934
The Securities Act of 1933
For a CPA firm considering the acceptance of new clients, which of the following characteristics would be a deterrent? The prospective client is a defendant in an antitrust suit brought by the U.S. Department of Justice. The prospective client is in the same line of business as two present clients and is in direct competition with one of them. The prospective client is long established but has shown little growth in recent years. The prospective client is in a new muchâ€'publicized industry offering the possibility of rapid growth but is under financed and possibly on the brink of bankruptcy.
The prospective client is in a new muchâ€'publicized industry offering the possibility of rapid growth but is under financed and possibly on the brink of bankruptcy.
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?
They would be liable for all losses attributable to their negligence.
Laws and court interpretations concerning a CPAs liability vary from one jurisdiction to another. TF?
True
The Securities Act of 1934 applies to: all companies within the United States with $10 million or more total assets and five or more shareholders. all companies under the jurisdiction of the Securities and Exchange Commission. all companies within the United States with $1 million or more total assets. all for-profit business corporations within the United States.
all companies under the jurisdiction of the Securities and Exchange Commission.
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:
common law
The client files a lawsuit against the CPAs for negligence in the performance of tax services. Which law applies? Common law The Securities Act of 1933 The Securities Exchange Act of 1934
common law
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
Under the 1934 Securities Exchange Act auditors are liable to ordinary trade creditors for: lack of due diligence. lack of good faith. gross negligence none of the above.
lack of due diligence.
The 1136 Tenants' Corporation case was chiefly important because of its emphasis upon the legal liability of the CPA when associated with: letters for underwriters. unaudited financial statements. an audit resulting in a disclaimer of opinion. a review on interim statements.
unaudited financial statements.
Under common law, auditors are generally liable to the client for: lack of due diligence. ordinary negligence, but not gross negligence. ordinary negligence or gross negligence. gross negligence, but not ordinary negligence.
ordinary negligence or gross negligence.
In the event that a CPA issues an unmodified audit report on financial statements that he or she knows to be misleading, that CPA is: subject to civil liability. subject to criminal as well as civil liability. not subject to liability if he performed no audit procedures relating to the misleading portions of the statements. not subject to liability if the client also knows the financial statements to be misleading.
subject to criminal as well as civil liability.
According to court decisions, the generally accepted auditing standards established by the AICPA apply: only when conducting audits subject to AICPA jurisdiction. only to those who choose to follow them. to all CPAs in public practice. only to the AICPA membership.
to all CPAs in public practice.
According to Statements on Auditing Standards, the auditor's responsibility for failure to detect fraud arises: only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor. only when the examination was specifically designed to detect fraud. when such failure clearly results from failure to comply with generally accepted auditing standards. whenever the amounts involved are material.
when such failure clearly results from failure to comply with generally accepted auditing standards.
Valid statements concerning gross negligence include all but which one of the following? Gross negligence may be viewed as "failure to exercise due professional care." Gross negligence is indicative of a reckless disregard for one's professional responsibilities. Substantial failures to comply with generally accepted auditing standards might be interpreted as gross negligence. Gross negligence is the lack of even slight care.
Gross negligence may be viewed as "failure to exercise due professional care."
In the event the auditors are negligent but no party suffers a financial loss, the auditors ordinarily have no civil liability.
T
Legal actions under common law require the plaintiffs to bear most of the burden of affirmative proof.
T
Privity does not generally exist between the auditors and a securities analyst who relies upon audited financial statements.
T
The Public Company Accounting Oversight Board has dramatically increased the number of actions brought against CPAs under the Racketeer Influenced and Corrupt Organizations Act.
T
A stockholder sustains a loss when he purchases 100 shares of stock in a public company (issuer) from another stockholder in reliance upon audited financial statements included in Form 10-K. Which law applies? Common law The Securities Act of 1933 The Securities Exchange Act of 1934
The Securities Exchange Act of 1934
The 1136 Tenants' case was important because of its emphasis upon the legal liability of the CPA when associated with: A review of annual statements. Unaudited financial statements. An audit resulting in a disclaimer of opinion. Letters for underwriters.
Unaudited financial statements.
TF? One reason that liability insurance rates are high for CPAs is that the number of persons who might be injured as a result of improper professional practice is large.
True