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Bus 434 Chap 20
Terms in this set (12)
Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial statements. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss.
If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not
Violate generally accepted auditing standards in performing the audit.
Which of the following best describes whether a CPA has met the required standard of care in auditing an entity's financial statements?
Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances.
Jenna Corporation approved a merger plan with Cord Corporation. One of the determining factors in approving the merger was the financial statements of Cord, which had been audited by Frank & Company, CPAs. Jenna had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed to discover fraud that later caused Jenna to suffer substantial losses. For Frank to be liable under common-law negligence, Jenna at a minimum must prove that Frank
Failed to exercise due care.
Brown & Company, CPAs, issued an unqualified opinion on the financial statements of its client King Corporation. Based on the strength of King's financial statements, Safe Bank loaned King $500,000. King Corporation and Safe Bank are both located in a state that follows the Ultramares doctrine. Brown was unaware that Safe would receive a copy of the financial statements or that they would be used by King in obtaining a loan. King defaulted on the loan.
If Safe commences an action for ordinary negligence against Brown, and Brown believes it will be able to prove that it conducted the audit in conformity with GAAS, Brown will
Not be liable to Safe, because there was a lack of privity of contract.
How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law?
Privity with purchasers is not a necessary element of proof.
To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove
Defendant's Intent to Deceive: No
Plaintiff's Reliance on theRegistration Statement:No
In a suit against Jay and Dart under the Section 11 liability provisions of the Securities Act of 1933, Hansen must prove that
The misstatements contained in Dart's financial statements were material.
If Hansen succeeds in the Section 11 suit against Dart, Hansen will be entitled to
Monetary damages comparable to the loss suffered.
Fritz Corporation, whose shares are publicly traded, engaged Hay Associates, CPAs, to audit its financial statements. Hay gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Hay's opinion was included in Fritz's Form 10-K filed with the Securities and Exchange Commission. Samson purchased shares and suffered a loss when the stock declined in value after the misstatements became known.
In a suit against Hay under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Samson must prove all of the following except that
Samson was a foreseen user of the financial statements.
Under the Private Securities Litigation Reform Act, Baker, CPA, reported certain uncorrected illegal acts to Supermart's board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal acts had a material effect on Supermart's financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to
Deliver a report concerning the illegal acts to the SEC within one business day.
Which of the following is not a provision of the Sarbanes-Oxley Act?
The statute of limitations for actions under Section 10(b) and Rule 10b-5 was reduced to one year from the discovery of fraud and five years after the fraud occurred.
Which of the following is a provision of the Foreign Corrupt Practices Act?
Every publicly held company must devise, document, and maintain a system of internal accounting controls sufficient to provide reasonable assurance that internal control objectives are met.
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