ACCT 323 Midterm Ch 4
the ___ requires registration of an intial stock sale
1933 act
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 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.
. Item (a) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. a. The plaintiff security purchaser must prove material misstatements were included in a filed document. Only applies to Section 11 of the 1933 Securities Act. Only applies to Section 10(b) of the Securities Exchange Act. Applies to both acts Applies to neither of the acts
Applies to both acts
Item (b) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA b. The plaintiff security purchaser must prove a monetary loss occurred. Only applies to Section 11 of the 1933 Securities Act. Only applies to Section 10(b) of the Securities Exchange Act. Applies to both acts. Applies to neither of the acts
Applies to both acts.
. Item (c) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. c. The plaintiff security purchaser must prove lack of due diligence by the CPA. Multiple Choice Only applies to Section 11 of the 1933 Securities Act. Only applies to Section 10(b) of the Securities Exchange Act. Applies to both acts. Applies to neither of the acts.
Applies to neither of the acts.
Item (d) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. d. The plaintiff security purchaser must prove privity with the CPA. Multiple Choice Only applies to Section 11 of the 1933 Securities Act. Only applies to Section 10(b) of the Securities Exchange Act. Applies to both acts. Applies to neither of the acts.
Applies to neither of the acts.
Which of the following approaches to auditors' liability is least desirable from the CPA's perspective?:
Rosenblum approach
a federal securities statute covering registration statements for securities to be sold to the public
Securities act of 1933
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 proven CPA negligence. The investor did not rely upon the financial statement. The CPA detected the misstatement after the audit report date. The audit work was adequate to support the CPA's opinion.
The audit work was adequate to support the CPA's opinion.
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
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 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."
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:
Win because there was no privity of contract between Hark and Third.
Which of the following is accurate with respect to litigation involving CPAs?:
a CPA may be exposed to criminal as well as civil liability
Ultramares approach
auditors must prove due dilligence
restatement approach
auditors must prove due dilligence
1933 act
auditors must prove due dilligence auditors must prove due dilligence
the __ case, a landmark case of liability under the securities act of 1933, involved criticism of the auditors' review for subsequent events
barchris
If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on:
gross negligence
A case by a client against its CPA firm alleging negligence would be brought under:
common law
If the CPAs provided negligent tax advice to a public company, the client would bring suit under:
common law
Unwritten law that has developed through court decisions; it represents judicial interpretation of a society's concept of fairness.
common law
Performing duties with such recklessness that persons believing the duties to have been completed carefully are being misled. The person performing the duties does not have knowledge of misrepresentations within the financial statements.
constructive fraud
Under common law, the CPAs who were negligent may mitigate some damages to a client by proving:
contributory negligence
CPAs should not be liable to any party if they perform their services with:
due professional care
under the securities act of 1933, initial purchasers of the security may sue the auditors fo misleading audited financial statements and need not prove that they relied on the financial statements. the burden of proof is on the auditors to prove that they were __- in the performance of their work
duly dilligent
Which of the following elements is most frequently necessary to hold a CPA liable to a client?:
failed to exercise due care
A CPA's duty of due care to a client most likely will be breached when a CPA:
fails to follow generally accepted auditing standards
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. c. An insider who had knowledge of all the facts regarding the loans to the two paper corporations could nevertheless recover from the accounting firm
false
the restatement approach requires responsibility towards _ users of the financial statements
foreseeen
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:
he performed the audit with due diligence
In addition to proving a loss, which of the following must be proven by a third party suing a CPA under section 10 of the 1034 SEC act misleading financial statements, reliance on financial statemnts a. yes, yes b. yes, no c. no, yes, d. no noo
idk
Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for:
intent to deceive or defraud
the third party approach revolves around auditor
liability
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: a. Loss sustained by client; suit brought under common law.
liable
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: c. Loss sustained by a bank known to the auditors to be relying on the financial statements for a loan; suit brought in a state court that adheres to the Credit Alliance v. Arthur Andersen precedent.-
liable
Violation of a legal duty to exercise a degree of care that an ordinarily prudent person would exercise under similar circumstances.
negligence
Under the Securities Act of 1933, the burden of proof that the plaintiff sustained a loss must be proven by the:
plaintiff
A method of allocating damages to each group that is liable according to that group's pro-rata share of any damages recovered by the plaintiff. For example, if the plaintiff was awarded a total of $500,000 and the CPAs were found to bear 30 percent of the responsibility for the damages, the CPAs would be assessed $150,000.
proportionate liability
Under the Securities and Exchange Act of 1934, auditors and other defendants are generally faced with:
proportionate liability
When damage to another is directly attributable to a wrongdoer's act, ________ _____ is said to exist?
proximate cause
a document including audited financial statements that must be filed with the sec by any company intending to sell its securities to the public through the mails or interstate commerce is called a __
registration statement
a _ of financial statements involves the performance of limited investigative procedures that provide a basis for the expression of limited assurance that there are no material departures from generally accepted accounting principles
review
the _ approach includes responsibility toward any foreseeable users of the financial statemtns
rosenblum
Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?:
rosenblum approach
under the 1934 act, third parties must prove
scienter
the 1934 act protects any person buying or __ thhe security
selling
In cases of breach of contract, plaintiffs generally have to prove all of the following, except:
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 false statement is immaterial in the overall context of the financial statements
the 1933 act requires ___ to prove a loss and misleading financial statements
third parties
rosenblum approach
third party must prove existence of scienter
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. b. The accounting firm has potential liability to any person who acquired the stock
true
the _ approach assigns responsibility by the auditor to the narrowest category of financial statement users
ultramares
the _ approach requires auditors to be responsible to known financial statement users
ultramares
Item (e) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. e. The plaintiff security purchaser must prove reliance on the document. Multiple Choice Only applies to Section 11 of the 1933 Securities Act. Only applies to Section 10(b) of the Securities Exchange Act Applies to both acts. Applies to neither of the acts.
Only applies to Section 10(b) of the Securities Exchange Act
. Item (f) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. f. The plaintiff security purchaser must prove the CPA had scienter. Multiple Choice Only applies to Section 11 of the 1933 Securities Act. Only applies to Section 10(b) of the Securities Exchange Act. Applies to both acts. Applies to neither of the acts.
Only applies to Section 10(b) of the Securities Exchange Act.
Assume that a client has encountered a $800,000 fraud and that the CPA's percentage of responsibility established at 20%, while the company itself was responsible for the other 80%. Under which approach to liability is the CPA most likely to avoid liability entirely?:
contributory negligence
the 1933 and 1934 acts include provisions for civil and _ charges against cpas
criminal
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. g. The Securities and Exchange Commission would defend any action brought against the accountants in that the SEC examined and approved the registration statement
false
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: d. Losses to stockholders purchasing shares at a public offering; suit brought under the Securities Act of 1933.-
liable
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: e. Loss sustained by a bank named as a third-party beneficiary in the engagement letter; suit brought under common law.-
liable
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: f. Loss sustained by a lender not in privity of contract; suit brought in a state court that adheres to the Rosenblum v. Adler precedent.-
liable
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: b. Loss sustained by trade creditor, not in privity of contract; suit brought in a state court that adheres to the Ultramares v. Touche Co. precedent.
not liable
Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following loss proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: g. Losses sustained by stockholders; suit brought under Sections 18(a) and 10(b) of the Securities Exchange Act of 1934
not liable
1934 act third party myst prove existence of scienter auditors must prove good faith
third party myst prove existence of scienter auditors must prove good faith
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. a. The Securities Act of 1933 applies to the above-
true
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. d. In court, investors who bought shares in Dandy Container need only show that they sustained a loss and that failure to explain the nature of the loans in question constituted a false statement or misleading omission in the financial statements.
true
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. e. The accountants could avoid liability if they could show they were not negligent.
true
Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the Securities and Exchange Commission along with the registration statement. Two hundred thousand shares of Dandy Container common stock were offered to the public at $11 a share. Eight months later the stock fell to $2 a share when it was disclosed that several large loans to two "paper" corporations owned by one of the directors were worthless. The loans were secured by the stock of the borrowing corporations, which was owned by the director. These facts were not disclosed in the financial statements. The director involved and the two corporations are insolvent. f. The accountants could avoid or reduce the damages asserted against them if they could establish that the drop in the stock's market price was due in whole or in part to other causes.-
true