Chapters 17 and 4

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.

Which of the following is least likely to result in an additional paragraph being added to an audit report? - The company is a component of a larger business enterprise. - An unusually important significant event. - A decision not to confirm accounts receivable. - A risk or uncertainty.

- A decision not to confirm accounts receivable.

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: - An emphasis-of-matter paragraph to the auditors' report. - A footnote to the financial statements. - The body of the financial statements. - The "summary of significant accounting policies" section of the financial statements.

- An emphasis-of-matter paragraph to the auditors' report.

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.

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.

Which of the following cases reaffirmed the principles in the Ultramares case? - Credit Alliance Corporation v. Arthur Andersen & Company - Rosenblum v. Adler. - Ernst & Ernst v. Hochfelder. - Escott v. BarChris Construction Corporation.

Credit Alliance Corporation v. Arthur Andersen & Company

Critical audit matters are most likely to include those matters that: - Are communicated to the Public Company Accounting Oversight Board. - Involve challenging, subjective or complex auditor judgment. - Are material weaknesses in internal control. - Involve significant risks.

Involve challenging, subjective or complex auditor judgment. By definition critical audit matters involve challenging, subjective or complex auditor judgment. While material weaknesses (Are material weaknesses in internal control) and significant risks (Involve significant risks) will often be considered critical audit matters, not all are, and the answers are less complete than answer (Involve challenging, subjective or complex auditor judgment).

When the matter is properly disclosed in the financial statements of a nonpublic company, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions? - QUALIFIED AND OR UNMODIFIED WITH ADD. PARAGRAPH

NO qualified YES unmodified with add. paragraph

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified and or Adverse

NO to Qualified YES to adverse (becuase pervasive)

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: - Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. - Not in accordance with generally accepted auditing standards. - A qualification that lessens the collective responsibility of both CPA firms. - An example of a dual opinion requiring the signatures of both auditors.

Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms.

An audit report for a public client indicates that the audit was performed in accordance with: - Generally accepted auditing standards (United States). - Standards of the Public Company Accounting Oversight Board (United States). - Generally accepted accounting principles (United States). - Generally accepted accounting principles (Public Company Accounting Oversight Board).

Standards of the Public Company Accounting Oversight Board (United States).

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.

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

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

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

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."

Which of the following approaches to auditors' liability is least desirable from the CPA's perspective? - Ultramares appraoch - rosenblum approach - the restatement of torts approach - the foreseen user appraoch

The rosenblum approach

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.

A material departure from generally accepted accounting principles will result in auditor consideration of: - Whether to issue an adverse opinion rather than a disclaimer of opinion. - Whether to issue a disclaimer of opinion rather than a qualified opinion. - Whether to issue an adverse opinion rather than a qualified opinion. - Nothing, because none of these opinions is applicable to this type of exception.

Whether to issue an adverse opinion rather than a qualified opinion.

A nonpublic company's change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions? - Qualified and or Unmodified with emphasis of matter paragraph

YES to qualified NO to unmodified with emphasis of matter

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly . . ." This is: - an unmodified opinion - a disclaimer of opinion - an expect for opinion - an improper type of reporting

an improper type of reporting

The auditors' report should be dated as of the date the: - Report is delivered to the client. - Auditors have accumulated sufficient appropriate evidence. - Fiscal period under audit ends. - Peer review of the working papers is completed.

- Auditors have accumulated sufficient appropriate evidence.

The most significant result of the Continental Vending case was that it: - Created a more general awareness of the possibility of auditor criminal prosecution. - Extended the auditor's responsibility to all information included in registration statements. - Defined the CPA's responsibilities for unaudited financial statements. - Established a precedent for auditors being held liable to third parties under common law for ordinary negligence.

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

An audit report for a public client indicates that the financial statements were prepared in conformity with: - Generally accepted auditing standards (United States). - Standards of the Public Company Accounting Oversight Board (United States). - Generally accepted accounting principles (United States). - Generally accepted accounting principles (Public Company Accounting Oversight Board).

- Generally accepted accounting principles (United States).

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: - Strict liability for all damages incurred. - Gross negligence. - Either ordinary or gross negligence. - Breach of contract.

- Gross negligence.

Under the Securities and Exchange Act of 1934, auditors and other defendants are generally faced with: - Joint liability. - Joint and several liability. - Proportionate liability. - Limited liability.

- Proportionate liability.