ACCY 131 Ch. 4
What type(s) of liability do CPA's have in the United States? A) Both common law and statutory law. B) Only common law. C) Only statutory law. D) Neither common law nor statutory law.
A) Both common law and statutory law.
The concept of privity may be important in defending auditors against potential claimants. Privity in general only allows: A) Clients to sue their auditors. B) Lenders of the client to sue the auditor. C) Anyone that relied upon the audited financial statements to make a decision to sue the auditor as long as the auditor knew or should have known of such reliance. D) Shareholders who relied upon the audited financial statements to make an investment decision.
A) Clients to sue their auditors.
Under common law, the CPAs who were negligent may mitigate some damages to a client by providing: 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
Which of the following cases reaffirmed the principles in the Ultramares case? A) Credit Alliance Corp. v Arthur Andersen & Co. B) Rosenblum v Adler C) Ernst & Ernst v. Hochfelder D) Escott v. BarChris Construction Corporation
A) Credit Alliance Corp. v Arthur Andersen & Co.
If a CPA performs an audit recklessly, CPA will be liable to third parties who were unknown and not foreseeable to the CPA for: A) Strict liability for all damages B) Gross negligence C) Either ordinary or gross negligence D) Breach of contract
B) Gross negligence
A CPA is considered 5% responsible for an investor's loss. Under which concept is it most likely that the CPA will be held liable for 100% of the damages if the other defendants are bankrupt? A) Common law liability. B) Joint and several liability. C) Proportionate liability. D) Statutory liability.
B) Joint and several liability.
A common stock investor's burden of proof relating to a CPA's deficiency of performance under the 1933 Securities Act, when compared to the 1934 Securities Exchange Act, is: A) Greater. B) Less. C) Equal. D) Indeterminate.
B) Less.
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
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
Establishing "due diligence" is most directly related to court cases tried under: A) Common law by third parties. B) Common law by clients. C) The 1933 Securities Act. D) The 1934 Securities Exchange Act.
C) The 1933 Securities Act.
A common law case in which the court held that auditors should be held liable for ordinary negligence only to third parties they know will use the financial statements for a particular purpose
Credit Alliance v. Arthur Andersen & Co.
If the CPAs provided negligent tax advice to a public company, the client would bring suit under: A) Securities Act of 1933 B) Securities Act of 1934 C) The federal income tax law D) Common law
D) Common law
A landmark case in which the auditors were held liable under Section 11 of the Securities Act of 1933
Escott v. BarChris Construction Corp.
A case that established that auditors should not be held liable under Securities Exchange Act of 1934 unless there was intent to deceive.
Hochfelder v. Ernst
A loss sustained by client: suit brought under common law. CPA were negligent but not grossly negligent; Liable or not liable
Liable
Loss is sustained by a bank named as a third-party beneficiary in the engagement letter, and a suit was brought under common law; CPA were negligent but not grossly negligent; Liable or not liable
Liable
Loss sustained by a bank known to the auditors to be relying on the financial statements for a loan and a suit is brought in a state court that adheres to the Credit Alliance v. Arthur Anderson precedent CPA were negligent but not grossly negligent; Liable or not liable
Liable
Loss sustained by a lender not in privity of contract, and a suit is brought up in the state court that adheres to the Rosenblum v. Adler precedent; CPA were negligent but not grossly negligent; Liable or not liable
Liable
losses to stockholders purchasing shares at a public offering, and a suit is brought under the Securities Act of 1933; CPA were negligent but not grossly negligent; Liable or not liable
Liable
losses sustained by stockholders, and a suit is brought up under Sections 18(a) and 10(b) of the Securities Exchange Act of 1934; CPA were negligent but not grossly negligent; Liable or not liable
Not Liable
Loss sustained by trade creditor, not in privity of contract; suit brought in a state court that adheres to the Ultramanes v. Touche Co. precedent CPA were negligent but not grossly negligent; Liable or not liable
Not liable
A case that established the precedent that auditors should be held liable under common law for ordinary negligence to all foreseeable third parties
Rosenblum v. Adler
A case in which the court used the guidance of the Second Restatement of the Law of Torts to decide the auditors' liability to third parties under common law
Rusch Factors, Inc. v. Levin
A landmark case establishing that auditors should be held liable to third parties not in privity of contract for gross negligence, but not for ordinary negligence
Ultramanes v. Touche & Co.
A case in which auditors were held liable for criminal negligence
United States v. Simon (Continental Vending)
The most significant result of the Continental Vending case was that it: A) Created a more general awareness of the possibly of auditor criminal prosecution B) Extended the auditor's responsibility to all information included in registration statements C) Defined the CPA's responsibility for unaudited financial statements D) Established a precedent for auditors being held liable to third parties under common law for ordinary negligence
A) Created a more general awareness of the possibly of auditor criminal prosecution
Ordinarily a claim of negligence against a CPA states that the CPAs performed their duties: A) Without due professional care. B) With reckless disregard of professional responsibilities. C) With wanton disregard to GAAS. D) With reckless disregard to GAAP.
A) Without due professional care.
In the cases of breach of contract, plaintiffs generally have to prove all the following, except: A) The CPAs had a duty B) The CPA made a false statement C) The client incurred losses related to the CPAs' performance D) The CPAs breached their duty
B) The CPA made a false statement
Which of the following approaches to auditor's liability its least desirable from the CPA's perspective: A) The Ultramares approach B) The Rosenbulm approach C) The Restatement of Torts approach D) The Foreseen User Approach
B) The Rosenbulm approach
Under which common law approach is an unidentified third party least likely to be able to recover damages from a CPA who is guilty of ordinary negligence? A) Due Diligence Approach. B) Ultramares Approach. C) Restatement of Torts Approach. D) Rosenblum Approach.
B) Ultramares Approach.
The 1136 Tenants' case was important because of its emphasis upon legal liability of the CPA when associated with: A) A review of annual statements B) Unaudited financial statements C) An audit resulting in a disclaimer of opinion D) Letters for underwriters.
B) Unaudited financial statements
Which of the following is not correct concerning the Securities Act of 1933 and Securities Exchange Act of 1934 with regard to auditor liability? A) The 1933 Act holds auditors to a higher standard of performance. B) The 1934 Act provides protection to more third parties. C) The 1933 Act relates to common law liability, while the 1934 Act relates to statutory law liability. D) Only the 1934 Act is affected by the Private Securities Litigation Reform Act of 1995 provision for proportionate liability under certain circumstances.
C) The 1933 Act relates to common law liability, while the 1934 Act relates to statutory law liability.
Under common law rules, a claimant suing a CPA firm based on an audit of financial statements must prove each of the following except: A) A loss was sustained. B) Reliance upon the audited financial statements was a proximate cause of the loss. C) The loss sustained was material to the claimant. D) The auditors were guilty of either ordinary or gross negligence, depending upon the claimant's recovery rights.
C) The loss sustained was material to the claimant.
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 purchases of securities mist prove that the 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"
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.
A CPA issued an unqualified opinion on the financial statements of a company that sold common sitka in a public offering subject tot ehSecurities Act of 1933. Based on the 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 statements 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
