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auditing

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Christian Cobo
Quiz by Christian Cobo, updated more than 1 year ago
Christian Cobo
Created by Christian Cobo over 8 years ago
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Question 1

Question
Which of the following is NOT a key element of the definition of ethics?
Answer
  • Reflective choice
  • Consequences of decisions
  • Moral principles
  • Definitive conclusion

Question 2

Question
Which of the following defines the imperative principle of ethics?
Answer
  • Ethic decisions cannot be resolved without evaluating all possible outcomes of all choices.
  • It is essential that decisions be made for the greater good of society.
  • All ethical decisions will have positive and negative consequences.
  • Ethics are a function of moral rules and principles.

Question 3

Question
Which of the following philosophical principles in ethics places emphasis on the consequences of action, rather than on following the rules?
Answer
  • Moral principle
  • Utilitarianism principle
  • Generalization principle
  • Imperative principle

Question 4

Question
What agency has the ultimate authority in defining independence for public companies?
Answer
  • SEC
  • AICPA
  • Congress
  • Department of Justice

Question 5

Question
Which of the following is the responsibility of the Professional Ethics Executive Committee?
Answer
  • Establish minimal ethical standards for financial reporting.
  • Make and enforce all the rules of conduct for CPAs who are AICPA members.
  • Enforce SEC ethical standards.
  • Act as an investigative body of the AICPA when ethical violations are suspected.

Question 6

Question
Which of the following is NOT one of the AICPA Principles of Professional Conduct?
Answer
  • Objectivity
  • Due Care
  • Reliability
  • Responsibilitie

Question 7

Question
Dara & Co. Audit Hill Corporation. Ellie is the engagement partner on the audit with an office in Buffalo Grove. Which of the following would NOT be considered a covered member?
Answer
  • Ben, a partner in Dara & Company, with an office in Buffalo Grove
  • Julie, a partner in Dara & Company, with an office in Elmhurst
  • Jason, who is a member of the attest engagement team with an office in Elmhurst
  • Adam, who is a tax partner and provided 50 hours of tax service to Hill Company during the year of the audit with an office in Elmhurst

Question 8

Question
Which of the following is NOT included in Rule of Conduct 102, Integrity and Objectivity?
Answer
  • Not subordinate judgment to others
  • Free of conflict of interests
  • Not knowingly misrepresent facts
  • Prudent assessment of facts

Question 9

Question
Based on Sarbanes-Oxley, who is ultimately responsible for the independence of the external auditor?
Answer
  • The CPA firm's quality control partner
  • The audit committee
  • The client's senior management
  • The CPA firm's engagement partner

Question 10

Question
According to Sarbanes-Oxley, the audit committee must pre-approve all audit and non-audit services. This can be done
Answer
  • Case-by-case basis: Yes; Through established policies: No; Delegating the responsibility: Yes
  • Case-by-case basis: No; Through established policies: Yes; Delegating the responsibility: No
  • Case-by-case basis: Yes; Through established policies: Yes; Delegating the responsibility: No
  • Case-by-case basis: No; Through established policies: No; Delegating the responsibility: Yes

Question 11

Question
Which of the following is NOT a restriction placed on audit partners by Sarbanes-Oxley?
Answer
  • Limits other partners associated with the engagement to a seven-year term.
  • Partners that engage in selling services, other than audit, review, and attestation services, to an audit client are not independent with respect to that client.
  • Limits engagement partners to a five-year term as the engagement partner.
  • Engagement partners must review nonaudit work to insure that independence has not been compromised.

Question 12

Question
Which of the following is true according to Government Independence Standards?
Answer
  • Nonaudit services are allowed providing the audit organization does not perform management functions, make management decisions, or audit its own work.
  • Nonaudit services are allowed as long as the nature of the service is publicly disclosed including a statement that independence has not been compromised.
  • Nonaudit services cannot be provided to a government entity that is an attest client.
  • Nonaudit services are allowed if they have been approved by the executive body of the governing organization.

Question 13

Question
Which of the following is allowed under the Government Independence Standards?
Answer
  • CPAs that perform nonaudit services are prohibited from being a member of the audit team.
  • The audit organization must never reduce the scope of the audit because of nonaudit services performed.
  • The government entity must have established policies to assure the nonaudit services will not affect the audit firm's ability to perform the audit.
  • Personnel who provide nonaudit services are prohibited from planning, conducting or reviewing audit work related to the nonaudit service.

Question 14

Question
Rule 201, General Standards, requires a member to comply with standards and interpretations. Which of the following is NOT a standard covered by Rule 201?
Answer
  • Sufficient relevant data
  • Independence
  • Due professional care
  • Planning and supervision

Question 15

Question
Maralee has been approached by J. Fox Entertainment to perform an audit of her theatre company. Maralee has never audited a theatre company before. Maralee can
Answer
  • accept the engagement with the understanding that additional hours will be required for Maralee to learn and understand the nature of the business.
  • not accept the engagement because she does not have the specialized industry knowledge.
  • recommend another auditor and receive a fee for the referral.
  • accept the engagement if she can obtain the required knowledge before the end of the engagement.

Question 16

Question
An audit client hires a member of the audit engagement team to be its new controller. Sarbanes-Oxley rules require that
Answer
  • the client disclose the controller's relationship in the notes to the financial statements.
  • the new controller sever all relations with the CPA firm, including any retirement funds.
  • the client find a new audit firm.
  • the new controller not take part in any discussions regarding the retention of the audit form.

Question 17

Question
The SEC requires companies to disclose fees paid to independent public accounting firms for audit and consulting services in the belief that
Answer
  • client directors and financial statement users should consider all aspects related to auditors' independence, and information about fees is important.
  • such disclosures will end the practice of auditors performing nonaudit services for audit clients.
  • financial analysts will attribute far less credibility to financial statements audited by public accounting firms that earn substantial nonaudit fees from audit clients.
  • audit firm consulting on client's accounting information processing systems essentially impairs audit independence.

Question 18

Question
CPA Krogstad is the executive in charge of the Omaha office of the audit firm. He is responsible for the practice in all areas of audit, tax, and consulting, but he does not serve as a field audit partner or a reviewer. CPA Ward is the partner in charge of the Dodger, Inc. audit (an SEC filing). The audit firm's independence is impaired if
Answer
  • Ward's fellow partner CPA Felix in the Omaha office has a wife who owns Dodger stock through a mutual fund held in her own employer's employee benefit plan.
  • Krogstad owns Dodger common stock.
  • Krogstad's brother owns 10 shares of Dodger common stock.
  • Ward's sister-in-law is a sales representative with a territory in California.

Question 19

Question
Which of the following philosophical theories places emphasis on following rules, rather than on the consequences of the decision?
Answer
  • Generalization principle
  • Virtue ethics
  • Utilitarianism
  • Imperative principle

Question 20

Question
Julie and Lisa are sisters. Julie is a CPA auditing the company where Lisa works. Julie's independence is impaired if
Answer
  • independence is impaired in all of these situations.
  • Lisa is the Controller.
  • Lisa is the marketing manager.
  • Lisa owns 25% of the company.

Question 21

Question
Which of the following sections is no longer included in the AICPA Rules of Conduct?
Answer
  • Independence, Integrity, and Objectivity
  • Responsibilities to Clients
  • General and Technical Standards
  • Responsibilities to Colleagues

Question 22

Question
The interpretation of Independence Rule 101 allows members to
Answer
  • be a trustee of a client pension or profit sharing trust.
  • have loans from a client that are collateralized by cash deposits held by the client.
  • hold a material indirect interest in a client.
  • have home mortgages with a client even if they are on the engagement.

Question 23

Question
The AICPA Council has designated the following bodies to pronounce accounting principles under Rule 203, except the
Answer
  • Governmental Accounting Standards Board.
  • Opinions of the Accounting Principles Board.
  • Auditing Procedures Board.
  • Financial Accounting Standards Board.

Question 24

Question
The interpretation of Rule 501, Acts Discreditable to the Profession, would not include
Answer
  • failure to follow government audit standards in government audits.
  • withholding a client's books until a professional fee is paid.
  • permitting others to make misleading entries in records.
  • membership in an activist political party.

Question 25

Question
According to Rule 203, Accounting Principles, requires the auditor to adhere to official pronouncements except when
Answer
  • adherence to a pronouncement would be misleading.
  • pending legislation may change the reporting requirements of the client.
  • complying would violate client confidentiality.
  • it has been established that financial statement users prefer an alternative presentation of information.

Question 26

Question
Rule 301 has been interpreted by the AICPA to explicitly allow a CPA to divulge confidential client information to
Answer
  • the Federal Trade Commission.
  • the U.S. Department of Justice.
  • the SEC.
  • the AICPA Professional Ethics Division.

Question 27

Question
Perry Pinkney, CPA, is one of the general partners in a partnership, which in turn invested 70% of its assets in the common stock of Pinkney's audit client (Darby Corporation). According to the AICPA Code of Professional Conduct, Pinkney is considered to have
Answer
  • an indirect financial interest in Darby.
  • no financial interest in Darby.
  • a partial financial interest in Darby.
  • a direct financial interest in Darby.

Question 28

Question
A client has omitted a significant disclosure from the financial statements. The auditor has asked the client to include the information, but the client refuses and claims the information is confidential. The position of the CPA should be that the information
Answer
  • cannot be considered confidential unless it can be covered by the attorney-client privilege.
  • is confidential and will only be disclosed under subpoena or for a regulatory investigation.
  • cannot be considered confidential if it is necessary to the completeness of the financial statements.
  • should be discussed with the audit committee to determine if the information should be disclosed.

Question 29

Question
Which of the following philosophical theories places emphasis on the consideration of projecting the consequences of a choice in terms of this question: "What may be the consequences of similar persons making this choice in similar circumstances?"
Answer
  • Virtue ethics
  • Utilitarianism
  • Generalization principle
  • Imperative principle

Question 30

Question
Which of the following forms of organization would NOT be allowed under Rule 505 of the Professional Code of Conduct?
Answer
  • Limited liability partnership; all partners are CPAs
  • Partnership; 40% of partners are CPAs
  • Limited liability corporation; all shareholders are CPAs
  • Limited liability partnership; 70% of partners are CPAs

Question 31

Question
Red and Green, CPAs are the external auditors for Blue Corporation, a publicly-held company. Blue Corporation has outsourced its internal audit function to Red and Green. Which of the following statements is true?
Answer
  • Public accounting firms cannot be both the internal and external auditors for publicly-held companies and maintain independence.
  • The independence of Red and Green is impaired only if employees of Red and Green act in a management capacity or make management decisions.
  • The independence of Red and Green is impaired only if a member of Red and Green's engagement team is hired to manage an accounting function in Blue Corporation.
  • Doing internal audit work does not impair the independence of Red and Green.

Question 32

Question
Violet, CPA, audits Big Bank, a local financial institution. Which of the following would most likely impair Violet's independence with regard to Big Bank?
Answer
  • A Visa credit card issued by Big Bank with a balance of $2,500
  • A home loan with the value of the house exceeding the mortgage balance
  • A personal loan collateralized by cash deposits at Big Bank
  • A car loan collateralized by the car

Question 33

Question
According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?
Answer
  • The client is the only tenant in a commercial building owned by the auditor.
  • The auditor is the officially appointed stock transfer agent of a client.
  • The client owes the auditor fees for more than two years prior to the issuance of the audit report.
  • The auditor's checking account that is fully insured by a federal agency is held at a client financial institution.

Question 34

Question
Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" on its letterhead?
Answer
  • All owners must be members.
  • The firm must be a dues-paying member.
  • At least one of the owners must be a member.
  • The owners whose names appear in the firm name must be members.

Question 35

Question
In which of the following circumstances would a CPA who audits XZ Corporation lack independence?
Answer
  • The CPA reduced XZ's usual audit fee by 40% prior to the audit because XZ's financial condition was unfavorable.
  • The CPA has an automobile loan from XZ, a financial institution. The loan is collateralized by the automobile.
  • The CPA and XZ's president each own 25% of FOB Corporation, a closely held company.
  • The CPA and XZ's president are both on the Board of Directors of COD Corporation.

Question 36

Question
According to the ethical standards of the profession, which of the following acts is generally prohibited?
Answer
  • Accepting a commission for recommending a product to an audit client
  • Accepting engagements obtained through the efforts of third parties
  • Purchasing a product from a third party and reselling it to a client
  • Writing a financial management newsletter promoted and sold by a by a publishing company

Question 37

Question
According to the ethical standards of the profession, which of the following acts is generally prohibited?
Answer
  • Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent
  • Retaining client records after an engagement is terminated prior to completion and the client has demanded their return
  • Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client
  • Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society

Question 38

Question
Which of the following statements include in the advertising of a CPA firm is permissible according to Rule 502, Advertising and Other Forms of Solicitation.
Answer
  • "Bob Bullet, CEO of A-One Corp., states that we are the best auditors his company has ever used."
  • "We have several tax partners that work closely with Judges and IRS attorneys on high-profile legal issues."
  • "We audit the five largest manufacturing companies in the state."
  • "We provide the best audit coverage of any firm in the state."

Question 39

Question
To which group can a CPA provide audit documentation without being subpoenaed and without the client's consent?
Answer
  • Another CPA firm considering the purchase of the auditing firm
  • Another CPA firm performing a peer review
  • The FASB
  • The IRS

Question 40

Question
Auditors should not be liable to any party if they perform services that met the standards of
Answer
  • ordinary negligence.
  • due care.
  • good faith.
  • regulatory providence.

Question 41

Question
A principle that may reduce or eliminates auditors' liability to clients is
Answer
  • client's constructive negligence.
  • auditors' gross negligence.
  • auditors' ordinary negligence.
  • client's contributory negligence.

Question 42

Question
Elliot Corp. is interested in purchasing Roger Corp. Prior to the purchase Elliot hired Adam & Co. to audit the financial statements of Roger. During the audit, Adam & Co. failed to discover a fraud that resulted in material misstatements in Roger's financial statements. After the acquisition, the fraud was discovered and Elliot Corp. suffered substantial losses. If Elliot sues Adam & Co., Elliot must prove that Adam & Co
Answer
  • failed to exercise the appropriate level of professional care.
  • knew of the instances of fraud.
  • acted recklessly or with lack of reasonable grounds for belief.
  • demonstrated gross negligence.

Question 43

Question
Which of the following statements is true concerning auditors' responsibilities during the audit?
Answer
  • Auditors are strictly liable for failures to discover client fraud.
  • Auditors are not liable unless they commit gross negligence or intentionally disregard generally accepted auditing standards.
  • Auditors must exercise the level of care, skill, and judgment expected of a reasonably prudent auditor under the circumstances.
  • Auditors must plan the audit to gather sufficient competent evidence to guarantee the accuracy of the financial statements.

Question 44

Question
Kerry CPA is the auditor for Sammy Corp. During the audit, Kerry discovers a material misstatement in Sammy's financial statements. Sammy's management tells Kerry that if the misstatement is corrected or if Kerry issues an opinion that indicates there is a material misstatement, Sammy Corp. will likely have to declare bankruptcy and thousands of employees will lose their jobs. Which of the following statements is true if the misstatement is not corrected and Kerry issues an unqualified opinion on Sammy's financial statements?
Answer
  • Kerry is likely liable to third parties even if the third parties were aware of the fraud and did not rely on the opinion.
  • Kerry is liable only to third parties in privity of contract.
  • Kerry is likely liable to any person who suffered a loss as a result of the fraud.
  • Kerry is liable only to known users of the financial statements.

Question 45

Question
Mays bought McCovey Corp. common stock in an offering registered under the Securities Act of 1933. Hart & Co., CPAs, gave an unqualified opinion on McCovey's financial statements that were included in the registration statement filed with the Securities and Exchange Commission. Mays sued Hart under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Mays must prove that
Answer
  • there was fraudulent activity by Hart.
  • Mays relied on Hart's opinion.
  • Mays was in privity with Hart.
  • the financial statements contained a material misstatement.

Question 46

Question
To prevail in an action brought under common law, the plaintiff must show all of the following except
Answer
  • auditors knew the financial statements contained a material misstatement.
  • the financial statements contained a material misstatement.
  • he or she relied on the financial statements.
  • he or she was damaged or suffered a loss.

Question 47

Question
Failure to provide any level care in fulfilling a duty owed to another party, including reckless disregard for the truth, is called
Answer
  • constructive fraud.
  • privity.
  • ordinary negligence.
  • breach of contract.

Question 48

Question
Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are required to be filed with a regulatory body by October 1. Humphrey does not complete the audit until October 5. Lauren is late filing the financial statements and is fined $100,000 by the regulatory body. Lauren would most likely sue Humphrey claiming
Answer
  • constructive fraud.
  • gross negligence.
  • ordinary negligence.
  • breach of contract.

Question 49

Question
Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to Key Largo Bank for a loan. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming
Answer
  • it was a foreseeable party.
  • it was a foreseen party.
  • it was a primary beneficiary.
  • it was in privity of the contract.

Question 50

Question
Lauren hires Humphrey, a CPA, to provide an audit of her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to financial institutions for a loan, but does not name any financial institutions. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming
Answer
  • it was in privity of the contract.
  • it was a foreseeable party.
  • it was a foreseen party.
  • it was a primary beneficiary.

Question 51

Question
Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are needed for a filing with a regulatory body. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves a loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming
Answer
  • it was in privity of the contract.
  • it was a foreseeable party.
  • it was a foreseen party.
  • it was a primary beneficiary.

Question 52

Question
If an audit is performed for the benefit of a specific person or organization, that person or organization is known as a(n)
Answer
  • foreseeable third party.
  • prime benefactor.
  • primary beneficiary.
  • party to the contract.

Question 53

Question
At the request of James Company's management, E.G. audited James Company's financial statements and was aware that James' management intended to deliver the financial statements to its 25 shareholders for the purpose of repurchasing their shares for $50 per share (the investors had originally purchased the shares for $5 per share). The audit was conducted in accordance with generally accepted auditing standards and the financial statements were prepared in accordance with generally accepted accounting principles. Later, the shareholders sued the auditors, claiming that if they fully realized the significance of disclosures about the market value of the assets, they could have received $75 per share from James Company. The shareholders' lawsuit will probably fail because
Answer
  • the shareholders did not rely properly on the financial statements.
  • the shareholders failed to prove lack of appropriate professional care on the part of auditors.
  • the shareholders did not suffer a loss.
  • the shareholders were not primary beneficiaries of the audit engagement and they have no standing to sue.

Question 54

Question
Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages?
Answer
  • Issuing an unqualified auditors' opinion when evidence suggests that the financial statements were not prepared according to generally accepted accounting principles
  • Reckless disregard of evidence that the financial statements do not conform to generally accepted accounting principles
  • Failure to investigate possible fraud when other entities in the industry have experienced frauds
  • Gross negligence amounting to constructive fraud

Question 55

Question
Lancaster & Co. CPAs is auditing the financial statements of Cooper Corporation. During the course of the audit, Cooper Corporation sent the following memo to the engagement partner: We have requested $1 million worth of products from Ladd Corporation with credit terms of net 30 days. Ladd has requested audited financial statements for its credit decision. We notified Ladd that our annual audit was in process and we would provide the audited financial statements to them as soon as they were completed. Which of the following statements is true with regards to this memo?
Answer
  • The memo is only a courtesy and does not alter the terms of the engagement letter or change the nature of Ladd Corporation's standing to sue.
  • The memo is an amendment to the engagement letter and makes Ladd Corporation a primary beneficiary of the audited financial statements.
  • The memo may move Ladd Corporation closer to a primary beneficiary and reposition them as third party with a standing to sue, depending on the jurisdiction of any future lawsuits.
  • The memo is an additional contract placing Ladd in privity of contract.

Question 56

Question
When bringing suit against auditors under section 10(b) of the Securities Exchange Act of 1934, plaintiffs must allege and prove
Answer
  • the plaintiffs purchased the specific securities through a public offering and thus have a right to sue.
  • the financial statements in the offering registration filing contained a material misstatement.
  • auditors were guilty of ordinary negligence and failed to discover material misstatements in the financial statements.
  • auditors were aware of material misstatements in the financial statements.

Question 57

Question
Which of the following parties is most likely to recover against auditors for losses resulting from acts of ordinary negligence?
Answer
  • Third parties that auditors should have foreseen could rely on the client's financial statements
  • Third parties whose reliance on the client's financial statements was reasonably foreseeable
  • Purchasers and sellers of securities under the Securities Exchange Act of 1934
  • The auditors' client

Question 58

Question
An audit failure occurs when
Answer
  • auditors cannot collect audit fees owed to them by the client.
  • auditors are sued by a third party.
  • auditors fail to conduct the examination in accordance with generally accepted auditing standards, which results in the failure to identify material misstatements in the financial statements.
  • a client goes bankrupt or has serious financial difficulty.

Question 59

Question
Third-party plaintiffs bringing action under common law need not prove
Answer
  • breach of contract.
  • they were damaged or suffered an economic loss.
  • reliance on the financial statements
  • the financial statements were direct cause of loss.

Question 60

Question
Typical defenses for auditors in common law actions include all of the following, except
Answer
  • the plaintiff was foreseen
  • the plaintiff contributed to the failure to detect material misstatements.
  • the financial statements were not materially misstated.
  • the audit was conducted in accordance with generally accepted auditing standards.

Question 61

Question
The Securities Act of 1933
Answer
  • regulates the accounting profession.
  • regulates trading in securities.
  • approves and guarantees investments.
  • regulates the initial issuance of securities.

Question 62

Question
Which of the following would not need to be demonstrated by third parties bringing suit against auditors for losses sustained under the Securities Act of 1933?
Answer
  • Purchasers would need to demonstrate all of these.
  • The client's financial statements contained a material misstatement.
  • Third-party purchasers suffered a loss.
  • Auditors were aware of the materially misstated financial statements.

Question 63

Question
The SEC Rule 10b-5 deals with
Answer
  • fraud in the purchase or sale of securities.
  • the use of the "due diligence" defense to avoid liability.
  • penalties for willfully and knowingly violating the Securities Exchange Act of 1934.
  • integrated disclosure system for annual reports.

Question 64

Question
The first significant case under section 11 of the Securities Act of 1933 charging auditors with not conducting a reasonable investigation was
Answer
  • Ernst & Ernst v. Hochfelder.
  • United States v. Benjamin.
  • Escott v. BarChris Construction Corp.
  • Rusch Factors v. Levin.

Question 65

Question
Foreseeable third parties are best described as
Answer
  • those third parties who have a direct relationship with auditors through previous contract related to the audit engagement.
  • those third parties whose decisions normally rely on audited financial statements and opinions on those financial statements.
  • those third parties who will rely on the audit and are specifically known by auditors.
  • management of the entity.

Question 66

Question
Which of the following statements about the Securities Act of 1933 is not true?
Answer
  • The plaintiff need not prove that the materially misstated financial statements are the direct cause of the loss.
  • Any purchaser of securities may sue auditors.
  • The plaintiff must prove they read and relied upon the financial statements.
  • The plaintiff must prove damages or an economic loss.

Question 67

Question
The restatement of torts is a general legal doctrine that extends liability for ordinary negligence to
Answer
  • all users of financial statements.
  • primary beneficiaries.
  • foreseen third parties.
  • foreseeable third parties.

Question 68

Question
Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act?
Answer
  • The full amount of damages may be recovered from any defendants involved in the action.
  • A solvent defendant's liability may be increased by 50 percent if other defendants are insolvent.
  • Defendants who knowingly committed a violation of securities laws remain jointly and severally liable.
  • The total responsibility for loss is divided among all parties responsible for the loss.

Question 69

Question
Paula performed the audit of the financial statements of Abdul Company (a nonpublic entity currently not subject to filing requirements under the Securities Act of 1933 or Securities Exchange Act of 1934). Abdul Company is currently considering several alternatives for raising capital, including seeking financing from area banks or an initial public offering of its securities. Which of the following parties would have the lowest likelihood of successfully bringing suit for ordinary negligence against Paula?
Answer
  • Abdul Company
  • Simon Whitaker, a private investor who is considering acquiring Abdul Company
  • First State Bank, a bank with whom Abdul Company has not previously done business
  • Purchasers of Abdul Company's securities in an initial public offering

Question 70

Question
Which of the following factors would not influence third parties' abilities to bring suit against auditors for ordinary negligence under common law?
Answer
  • The jurisdiction in which the action occurred
  • The relationship between the auditors and third party
  • The nature of activity by auditors that resulted in their failure to exercise appropriate levels of professional care
  • The extent to which the third party relied upon the misstated financial statements and this reliance resulted in their loss

Question 71

Question
According to Sarbanes-Oxley, accountants performing an audit or review must maintain all engagement documentation for a period of
Answer
  • 5 years.
  • 3 years.
  • 2 years.
  • 7 years.

Question 72

Question
Which of the following statements concerning the Ultramares Corp. v. Touche case is not true?
Answer
  • This case concluded that auditors' liability to third parties would be generally limited to gross negligence or fraud.
  • This case established the rights of third parties to bring suits against auditors under common law liability.
  • This case provided a test to determine whether a third party qualified as a primary beneficiary and could bring suit for ordinary negligence.
  • This case was brought under common law liability.

Question 73

Question
In a common law action against auditors, lack of privity is a viable defense if the plaintiff
Answer
  • bases the action upon fraud.
  • is the auditors' client.
  • can prove gross negligence by auditors that amounts to a reckless disregard for the truth.
  • is the client's creditor who sues auditors for ordinary negligence.

Question 74

Question
Under the liability provisions of section 11 of the Securities Act of 1933, auditors may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the registration statement. Under section 11, auditors usually will not be liable to the purchaser
Answer
  • unless the purchaser can prove scienter on the part of auditors.
  • unless the purchaser can prove privity with auditors.
  • if auditors can show contributory negligence on the part of the purchaser.
  • if auditors can demonstrate due diligence.

Question 75

Question
Under the liability provisions of section 11 of the Securities Act of 1933, auditors may be liable to any purchaser of securities for certifying materially misstated financial statements that are included in the registration statement. Under section 11, which of the following must be proven by a purchaser of the security?
Answer
  • Reliance on financial statements: Yes; Fraud by auditors: No
  • Reliance on financial statements: Yes; Fraud by auditors: Yes
  • Reliance on financial statements: No; Fraud by auditors: Yes
  • Reliance on financial statements: No; Fraud by auditors: No

Question 76

Question
Beckler & Associates, CPAs, examined and issued an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover? I. Beckler did not conduct the audit with the appropriate level of professional care. II. Mac relied on the financial statements.
Answer
  • Neither I nor II.
  • Both I and II.
  • II only.
  • I only.

Question 77

Question
While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under section 11 of the Securities Act of 1933?
Answer
  • Larson will not be liable if the purchaser did not rely on the financial statements.
  • The purchaser must prove that Larson knew of the material misstatements.
  • Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate.
  • The purchaser must prove that Larson failed to conduct the audit in accordance with generally accepted auditing standards.

Question 78

Question
While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson, Larson's best defense would be that the
Answer
  • identity of the purchaser was not known to Larson at the time of the audit.
  • audit was conducted in accordance with generally accepted auditing standards.
  • client was aware of the misstatements.
  • purchaser was not in privity of contract with Larson.

Question 79

Question
While conducting an audit of a public entity, Wallace failed to identify material misstatements in its client's financial statements. Investors then sued Wallace in connection with this audit. Which of the following would not need to be demonstrated in order for the shareholders to successfully bring suit against Wallace?
Answer
  • The shareholders relied upon the materially misstated financial statements.
  • Wallace was in privity with the shareholders.
  • The reliance on the materially misstated financial statements caused the shareholders' losses.
  • Wallace acted with gross negligence in his audit.

Question 80

Question
Sun Corp. approved a merger plan with Cord Corp. One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co., CPAs. Sun had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses. For Frank to be liable under common law liability, Sun at a minimum must prove that Frank
Answer
  • acted with scienter.
  • failed to exercise the appropriate level of professional care.
  • demonstrated gross negligence.
  • knew of the irregularities.

Question 81

Question
Which of the following elements, if present, would support a finding of constructive fraud on the part of auditors?
Answer
  • Actions that demonstrated scienter
  • Gross negligence in conducting the engagement
  • Failure to perform the engagement in accordance with the terms in the engagement letter
  • Ordinary negligence in conducting the engagement

Question 82

Question
To be successful in a civil action under section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement, the plaintiff must prove
Answer
  • Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: No
  • Auditors' intent to deceive: No; Plaintiff's reliance on the registration statement: Yes
  • Auditors' intent to deceive: Yes; Plaintiff's reliance on the registration statement: No
  • Auditors' intent to deceive: Yes; Plaintiff's reliance on the registration statement: Yes

Question 83

Question
Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated financial statements?
Answer
  • A disclaimer contained in the engagement letter
  • Lack of privity
  • Lack of scienter
  • Contributory negligence on the part of the client

Question 84

Question
Under the anti-fraud provisions of section 10(b) of the Securities Exchange Act of 1934, auditors may be liable if they acted
Answer
  • without good faith.
  • with ordinary negligence.
  • without due diligence.
  • with independence.

Question 85

Question
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?
Answer
  • Purchasers have to prove either fraud or gross negligence as a basis for recovery.
  • Purchasers only have to prove loss caused by reliance on audited financial statements.
  • Privity with purchasers is not a necessary element of proof.
  • Auditors are held to a standard of care described as professional skepticism.

Question 86

Question
Which of the following is not a reason that the Class Action Fairness Act of 2005 will benefit auditors in class action lawsuits?
Answer
  • Verdicts in state courts are normally more appropriate to apply to multiple jurisdictions than verdicts in federal courts.
  • State courts may discriminate against defendants from other jurisdictions.
  • Federal courts have more resources at their disposal for managing class action lawsuits.
  • Federal courts provide a higher level of scrutiny for class action lawsuits than state courts.

Question 87

Question
Under the Securities Act of 1933, which of the following defenses is related to auditors performing a reasonable investigation of the financial statements?
Answer
  • Causation
  • Prudent auditor
  • Due diligence
  • Contributory negligence

Question 88

Question
Which of the following is not a valid defense for auditors' liability to third parties for ordinary negligence under common law?
Answer
  • Third parties did not rely upon the financial statements
  • The loss was caused by factors other than the materially misstated financial statements
  • Lack of proper standing (relationship) to bring suit in that jurisdiction
  • Lack of a privity relationship with auditors
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