Auditing Chapter 4 M/C
Terms in this set (42)
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 misstatement is immaterial in the overall context of the financial statements.
Which of the following is a correct statement related to CPA legal liability under common law?
CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.
Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for:
Existence of scienter.
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.
An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the Restatement of Torts approach to liability the auditor is generally liable to the bank which subsequently grants the loan for:
Either ordinary or gross negligence.
An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the foreseeable third party approach the auditor is generally liable to the bank which subsequently grants the loan for:
Either ordinary or gross negligence.
Which of the following forms of organization is most likely to protect the personal assets of any partner, or shareholder who has not been involved on an engagement resulting in litigation?
Limited liability partnership
Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?
Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $500,000. The auditor's liability is most likely based upon which approach to assessing liability?
Joint and several liability.
Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. The CPA has been required to pay $50,000. The auditor's liability is most likely based upon which approach to assessing liability?
Assume that a client has encountered a $500,000 fraud and that the CPA's percentage of responsibility established at 10%, while the company itself was responsible for the other 90%. Under which approach to liability is the CPA most likely to avoid liability entirely?
In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law?
Rosenblum v. Adler.
The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be:
Greater than the Securities Act of 1933.
CPAs should not be liable to any party if they perform their services with:
Due professional care.
The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for:
Either ordinary or gross negligence.
A principle that may reduce or entirely eliminate auditor liability to a client is:
Client contributory negligence.
Under the Securities Act of 1933 the burden of proof that the plaintiff sustained a loss must be proven by the:
A case by a client against its CPA firm alleging negligence would be brought under:
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.
Which of the following court cases highlighted the need for obtaining engagement letters for professional services?
1136 Tenants Corporation v. Rothenberg.
In which type of court case is proving "due diligence" essential to the auditors' defense?
Court cases brought under the Securities Act of 1933.
Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?
Rosenblum v. Adler
Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements?
Lack of gross negligence.
Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933?
Material misstatements were contained in the financial statements.
A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan the CPA's best defense would be that the:
Audit complied with generally accepted auditing standards.
The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who:
Unknowingly violates the 1934 Securities Exchange Act
Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995?
It makes recovery against CPAs more difficult under common law litigation.
A limited liability partnership form of organization:
Eliminates personal liability for some, but not all, partners.
Which of the following is accurate with respect to litigation involving CPAs?
A CPA may be exposed to criminal as well as civil liability.
Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover certain instances of fraud which have subsequently caused Starr to suffer substantial losses. In order for Cox to be liable under common law, Starr at a minimum must prove that Cox:
Failed to exercise due care.
Dexter and Co., CPAs, issued an unqualified opinion on the 20X3 financial statements of Bart Corp. Late in 20X4, Bart determined that its treasurer had embezzled over $1,000,000. Dexter was unaware of the embezzlement. Bart has decided to sue Dexter to recover the $1,000,000. Bart's suit is based upon Dexter's failure to discover the missing money while performing the audit. Which of the following is Dexter's best defense?
That the audit was performed in accordance with GAAS.
Under common law, when performing an audit, a CPA:
Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances.
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.
Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?
The CPA probably is liable to any person who suffered a loss as a result of the fraud.
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:
Is the client's creditor who sues the accountant for negligence.
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:
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.
Under the Ultramares rule, to which of the following parties will an accountant be liable for ordinary negligence?
Parties in privity
Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that:
There was a material misstatement in the financial statements.
Bran, CPA, audited Frank Corporation. The shareholders sued both Frank and Bran for securities fraud under the Federal Securities Exchange Act of 1934. The court determined that there was securities fraud and that Frank was 80% at fault and Bran was 20% at fault due to her negligence in the audit. Both Frank and Bran are solvent and the damages were determined to be $1 million. What is the maximum liability of Bran?
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
The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of:
Registered Public Accounting Firms and their Employees