NAME: ________________________

Legal Environment for CPA's Test

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5 Written Questions

5 Matching Questions

  1. Proportionate Liability
  2. Regulation S-X
  3. Deep Pocket Theory
  4. Private Securities Litigation Reform Act 1995
  5. Statutory Law
  1. a Eastablishes form, content, and requirements of financial statements
  2. b If Public company, auditor must inform Board of Directors for illegal acts by client.
    BOD has one day to inform SEC
    If don't; auditor has one day to inform SEC, or resign from audit and inform SEC,
    SEC may impose fines on auditor if not informed of illegal act
  3. c Sue those who can pay. Want the firm to settle to make a quick buck even if firm did nothing wrong.
  4. d defendant would be required to pay a proportionate share of the damage, depending on the degree of fault determined by judge or jury
  5. e Liability is based on federal securities laws or state stutes

5 Multiple Choice Questions

  1. Place emphasis within firm on complying with GAAS and professional ethics,
    investigate prospective clients thoroughly,
    obtain a thorough knowledge of clients business,
    use engagement letters to prevent misunderstanding, asses risk of errors and irregularities, exercise extreme care in audits of clients with high business risk, carefully prepare and review working papers.
  2. Have material effect on financial statements
  3. Auditors know audited financial statements were to be used for a particular purpose, but auditors did not necessarily know the specific user
  4. Damages ought to be paid to those suffering losses caused by each party. Suffering party can recover full damages from any party. Usually % of fault is the percentage of damages each defendant pays but many cases Management is in bankruptcy so auditor is left to pay everything
  5. May exceed that of other professions because:
    number of parties suffering significant losses,
    possibly millions of investors as well as firms creditors,
    amounts can be excessive in some cases exceeding the limits of professional liability insurance

5 True/False Questions

  1. Procedures of Illegal ActsHave material effect on financial statements


  2. Securities Act of 1933Established the SEC and established requirement for annual audited financial statements


  3. Common Lawliability concepts are developed through court decisions based on negligence, gross negligence, fraud, or breach of contract


  4. Securities Exchange Commissionrequires audited financial statements in registration statements of initial public offerings


  5. Rosenblum ApproachAuditors know audited financial statements were to be used for a particular purpose by a known third party user


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