Auditing Chapter 4

Which of the following would be the first form filed with the SEC describing a major change in corporate governance? a. 8-K b. 8-Q c. 10-K d. 10-Q

a. 8-K

Generally, auditors can be sued for breach of contract by which of the following parties? a. Clients b. Shareholders c. Third parties other than shareholders d. All of the above

a. Clients

T/F: Claims against auditors based on the deep pocket theory are most likely to occur in courts where damages are based on proportionate liability.

False

T/F: Class action lawsuits are described to encourage multiple lawsuits arising from the same claim.

False

T/F: An audit failure occurs when an audit firm issues an inaccurate audit opinion and fails to comply with auditing standards.

True

Which of the following statements regarding liability doctrines is NOT true? a. Joint and several liability cannot be applied in class-action-lawsuits b. Proportionate liability generally applies to lawsuits filed in federal court. c. Under proportionate liability, a defendant's share of damages depends on the degree of fault determines by the judge or jury. d. Joint and several liability provides more protection to users who experience losses from relying on misstated financial statements.

a. Joint and several liability cannot be applied in class-action lawsuits

Liability based on federal securities law is known as which type of law? a. Statutory law b. Contract law c. Common law d. Commercial law

a. Statutory law

Which of the following is NOT a potential cause for action against the auditor for breach of contract? a. Withdrawing from an audit engagement due to unresolved disagreements with management b. Failing to discover a material error in the financial statements c. Failing to provide the audit report on time d. Violating client confidentiality

a. Withdrawing from an audit engagement due to unresolved disagreements with management

Which of the following has contributed to a decrease in federal class actions involving audit firms as co-defendants over the last decade? a. A growing expectations gap causing investors to view audit reports as insurance against losses. b. Supreme Court decisions in Janus Capital Group, Inc., and Stoneridge Investment Partners. c. Federal restrictions on contingent fees for lawyers in lawsuits filed under the Securities Act of 1934. d. All of the above

b. Supreme Court decisions in Janus Capital Group, Inc., and Stoneridge Investment Partners.

The concept of the third-party beneficiary test was established by which court case? a. Rosenblum v. Adler. b. Ultramares Corp. v. Touche. c. Citizens State Bank v. Timm, Schmidt, & Co. d. Credit Alliance Corp. v. Arthur Andersen & Co.

b. Ultramares Corp. v. Touche.

A jury has determined that Jason Pruitt, CPA, is 20% at fault for losses suffered by investors who relied on materially misstated financial statements. The jury found that Pruitt's co-defendants, the client company and the company's CEO, are each 40% at fault. The company is bankrupt, and only Pruitt and the CEO have adequate resources to pay damages. Under joint and several liability, what is the likely percentage of damages that Pruitt will pay? a. 20% b. 20% plus 50% of damages attributed to the company c. 20% plus a proportionate share damages attributed to the company. d. 100% of damages

c. 20% plus a proportionate share damages attributed to the company.

Which is the best definition of scienter? a. A material omission of facts d. Fraudulent conduct in the purchase of a security c. A wrong state of mind when making a misrepresentation d. A casual connection between a misstatement and a material loss

c. A wrong state of mind when making a misrepresentation

Which of the following may an auditor use as a defense under the Securities Act of 1933? a. Contributory negligence b. Immaterial loss c. Due care d. Scienter

c. Due care

Which of the following is NOT an incentive for filling lawsuits against audit firms? a. Class action lawsuits b. Joint and several liability doctrine c. Increased complexity of accounting standards d. Contingent-fee-based compensation for law firms

c. Increased complexity of accounting standards

Which of the following documents must be filed with the SEC under the Securities Act of 1933 before a company can issue new securities to the public? a. Form 10-K b. Form 10-Q c. Prospectus d. All of the above

c. Prospectus

To win a lawsuit against an auditor, third parties generally have to prove which of the following? a. The parties suffered a loss b. A loss occurred due to reliance on misleading financial statements c. The auditory knew, or should have known, financial statements were misleading d. All of the above

d. All of the above

Under common law, which of the following is a basis for litigation against an auditor for failure to meet professional standards and responsibilities? a. Fraud b. Gross negligence c. Ordinary negligence d. All of the above

d. All of the above

Which of the following statements describes the expectations gap as it relates to audit financial statements? a. Investors believe that an unqualified audit report is an insurance policy against losses from a risky investment. b. Investors believe that an unqualified audit report guarantees that an investment in the audited company is risk-free. c. Investors believe they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. d. All of the above

d. All of the above

Which of the following is NOT a basis for a third-party lawsuit against an auditor? a. Fraud b. Common law c. Gross negligence d Breach of contract

d. Breach of contract

Compliance with GAAP was an unsuccessful defense in which of the following court cases? a. Ultramares Corp. v. Touche. b. Ernst and Ernst v. Hochfelder. c. Credit Alliance v. Arthur Andersen & Co. d. Herzfeld v. Laventhol, Krekstein, Horwath & Horwath.

d. Herzfeld v. Laventhol, Krekstein, Horwath & Horwath.