Auditing Chp 4
Terms in this set (53)
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:
Which of the following approaches to auditors' liability is least desirable from the CPA's perspective?
The Rosenblum Approach
In cases of breach of contract, plaintiffs generally have to prove all the following except:
The CPAs made a false statement
If the CPAs provided negligent tax advice to a public co. the client would bring suit under:
Which of the following cases reaffirmed the principles in the Ultramares case?
Credit Alliance Corp. v. Arthur Andersen & Co.
Under common law the CPAs who were negligent may mitigate some damages to a client by proving:
Under securities and Exchange act of 1934 auditors and other defendants are faced with:
A CPA issued an unqualified opinion on the financial statements of a co. 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 statement
Which of the following elements is most frequently necessary to hold a cpa liable to a client?
Failed to exercise due care
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 most significant results of the continental vending case was that it:
Created a more general awareness of the possibility of auditor criminal prosecution
The 1136 tenants' case was important because of its emphasis upon the legal liability of the cpa when associated with:
Unaudited financial statements
As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp, Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft?
He would be liable for losses attributable to his negligence.
According to Statement of Auditing Standards number 1, the auditors responsibility for failure to detect fraud arises
when such failure clearly results from failure to comply with generally accepted auditing standards.
You have recently opened your CPA practice and had been engaged to issue your opinion on the financial statements of a closely held corporation, Closeco, who is selling out to a potential buyer. You diligently plan to begin working on the engagement. You're then requested to bid on providing ongoing audit services to another corporation. Because of the potential for reoccurring work you postpone your work with Closeco to pursue this new opportunity. Closeco's potential buyers lose interest because of the delay in obtaining audited financial statements, and they decide not by your clients company. Closeco sues you. Given this data, what is the likely outcome?
Closeco will recover damages for breach of contract.
If a client decides to go public, which of the following statements is true?
The Securities Act of 1933 imposes substantial additional potential liability to the CPA firm.
Which of the following statements is correct with respect to the auditors responsibilities relative to the detection of indirect-effect illegal acts?
The auditor has no responsibility for searching for indirect effect illegal acts.
an auditor strives to achieve independence in appearance in order to:
maintain public confidence in the profession
A CPA issued an unqualified opinion on the financial statements of the 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 purchase shares of this public offering. which of the following represents a viable defense?
The misstatement is in material 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.
an auditor knew that the purpose of her audit was to render reasonable assurance on financials statements that would 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.
under section 10 of the 1934 securities exchange act auditors are liable to security purchasers for:
existence of scienter.
Jones, CBA, is in court defending himself against lawsuit filed under the 1933 securities act. The charges have been filed by purchasers of securities covered under the act. if the purchasers prove the 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 of 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.
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?
CPAs should not be liable to any party if they perform their services with:
due professional care
assume that $500,000 in damages are awarded to plaintiff, and the CPAs 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 $500000. The auditors liability is most likely based upon which approach to assessing liability?
joint and several liability
assume that $500,000 in damages are awarded to plaintiff, and the CPAs percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. CPA has been required to pay $50,000. The auditors liability is most likely based upon which approach to assessing liability?
assume that a client has encountered A $500,000 fraud and at the CPAs percentage of responsibility establishment 10%, while the company itself is responsible for the other 90%. Under which approach to liability is the CPA most likely to avoid liability entirely?
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 1933
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
The 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 client against CPA firm alleging negligence would be brought under
assume 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 the privity of contract in a suit brought in a state court which adheres to the ultramares versus touche precedent
which of the following court cases highlighted the need for obtaining engagement letters for professional services?
1136 tenants Corporation versus Rothenberg
in which type of court case is providing "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 versus 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 material misstated financial statements?
lack of gross negligence
which of the following must be proven by the plaintiff in a case against the 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 the client that the CPA knew was in the process of attaining a loan. in a suit by the bank issuing the loan the CPAs 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 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?
CBA may be exposed to criminal as well as civil law
Starr Corp approved a plan of merger with Silo Corp. The determining factors in approving the merger was the strong Financial statements of silo which were audited by Cox & Company., CPAs.Starr had engaged cox to audit silos financial statements. While performing the audit, Cox failed to discover certain instances of fraud which have subsequently caused Starr to suffer substantial losses. for Cox to be liable under common law, star at a minimum must prove that Cox:
failed to exercise due care
under common law, when performing an audit, the CPA:
must exercise a level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances
A CPAs 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 clients financial statements?
The CPA is probably 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 clients 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: