Ch 4 HW

Under common law, the CPAs who were negligent may mitigate some damages to a client by proving: -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. -The CPAs' fee was not material.

Contributory negligence.

The most significant result of the Continental Vending case was that it: -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. -Defined the CPA's responsibilities for unaudited financial statements. -Extended the auditor's responsibility to all information included in registration statements.

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

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

Credit Alliance Corp. v. Arthur Andersen & Co.

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.

A landmark case in which the auditors were held liable under Section 11 of the Securities Act of 1933.

Escott v. BarChris Construction Corp.

Which of the following elements is most frequently necessary to hold a CPA liable to a client? -Failed to exercise due care. -Was not independent of the client. -Acted with scienter or guilty knowledge. -Did not use an engagement letter.

Failed to exercise due care.

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. Required: State whether the following statement is true or false relating to original purchasers of the stock. 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

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. -Breach of contract. -Either ordinary or gross negligence.

Gross negligence

A case that established that auditors should not be held liable under the Securities Exchange Act of 1934 unless there was intent to deceive.

Hochfelder v. Ernst

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

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

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

Proportionate liability.

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

Which of the following approaches to auditors' liability is least desirable from the CPA's perspective? -The Ultramares approach. -The Restatement of Torts approach. -The Foreseen User approach. -The Rosenblum approach.

The Rosenblum approach.

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 CPA detected the false statement after the audit date. -The investor did not actually rely upon the false statement. -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 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 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 the auditors were negligent. -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."

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.

Ultramares v. Touche & Co.

The 1136 Tenants' case was important because of its emphasis upon the legal liability of the CPA when associated with: -An audit resulting in a disclaimer of opinion. -A review of annual statements. -Unaudited financial statements. -Letters for underwriters.

Unaudited financial statements.

A case in which auditors were held liable for criminal negligence.

United States v. Simon (Continental Vending)