Deck 51: Accountants' Liability

Question 1

An accountant is liable for constructive fraud when the accountant acts with a reckless disregard for his actions.

Answer 1

True

Question 2

The term privity refers to parties being in a contractual relationship with one another.

Answer 2

True

Question 3

The Restatement (Second)of Torts in part provides that accountants are liable to any member of a limited class of intended users for whose benefit the accountant has been employed to prepare the client's financial statements.

Answer 3

True

Question 4

In the Ultramares case involving negligence of a CPA firm,the firm was not found liable as it was not in a contractual relationship with the plaintiff.

Question 5

Generally,only the client of an accountant can bring a negligence claim against the accountant.

Question 6

For certified public accountants,audits must be conducted according to generally accepted auditing standards.

Question 7

An audit may be defined as a verification of a company's financial books and records.

Question 8

An accountant's actions are his or her own and therefore are judged on a subjective basis.

Question 9

Actual fraud happens when the accountant acts with "reckless disregard" for the truth or the consequence of his or her actions.

Question 10

Most public accounting firms are organized and operated as a limited liability partnership.

Question 11

Under the Ultramares decision,an accountant is liable only to those with whom the accountant is in privity of contract or a privity-like relationship.

Question 12

In order to be a certified public accountant,an accountant must have attained a minimum number of years of auditing experience.

Question 13

Accountant malpractice is based on an accountant's failure to meet uniform accounting standards.

Question 14

The issuance by an auditor of something other than an unqualified opinion makes little difference to the overall company's financial position.

Question 15

The rules of liability of accountants to third parties are essentially the same in all states.

Question 16

If an auditor is unable to draw a conclusion as to the accuracy of the company's financial records,the auditor may issue a disclaimer of opinion.

Question 17

The drawback to being a partner in a limited liability partnership is that the partners are personally liable for the debts and obligations of the limited liability partnership.

Question 18

A person who is not certified as an accountant is referred to as a private accountant.

Question 19

An accountant who performs an audit may follow other auditing standards than those in the GAAS.

Question 20

A client may seek damages for the expenses he or she incurred in securing another accountant if the initial accountant he or she hired failed to perform under the terms of the parties' original agreement.

Question 21

Accountants are not liable for failing to find misstatements or omissions of facts in a registration statement.

Question 22

There is no accountant-client privilege under federal law.

Question 23

Section 10(b)of the Securities Exchange Act of 1934 applies exclusively to the purchase of any security.

Question 24

Under the federal securities laws,the Securities and Exchange Commission decides whether to bring criminal charges against an accountant.

Question 25

If a client commits an illegal clearly inconsequential act,the accountant need not report it to the client's management and audit committee.

Question 26

Breach of contract is a common basis for third parties to recover from accountants.

Question 27

Accountants' working papers are protected from discovery in federal court cases.

Question 28

The Racketeer Influenced and Corrupt Organizations Act provides for both civil and criminal actions against accountants who violate its provisions.

Question 29

Generally,privity of contract is required for a party to recover from an accountant for matters relating to fraud.

Question 30

Section 18(a)of the Securities Exchange Act of 1934 imposes civil liability on any person who makes false or misleading statements in any application,report,or document filed with the SEC.

Question 31

Accountants can generally be held liable to more parties on a fraud theory than on a breach of contract theory.

Question 32

Accountants can be held liable under Section 11 of the Securities Act of 1933.

Question 33

Accountants' working papers remain the property of the client.

Question 34

In order for the foreseeability standard to apply,the accountant must know the identity of either the user or the intended class of users.

Question 35

The Private Securities Litigation Reform Act of 1994 expanded a defendant's liability regardless of an accountant's degree of fault.

Question 36

Accountants are considered experts under the Securities Act of 1933 with respect to the financial statements that are included in a registration statement.

Question 37

Securities must be registered with the Securities Exchange Commission before they can be sold.

Question 38

An accountant can be liable for misstatements in financial statements under Section 11 of the Securities Act of 1933 only if the accountant actually made the misstatement.

Question 39

Under the Securities Act of 1933,accountants are criminally liable only for willful misstatements in the financial statements.

Question 40

Under Section 11 of the Securities Act of 1933,an accountant cannot make use of the due diligence defense.

Question 41

Under the Securities Exchange Act of 1934,fraud or reckless conduct must be shown in order to impose liability on the accountant under either Section 10(b)or Section 18(a).

Question 42

The contractual arrangement of an accountant with the client is often referred to as a(n):

A) matter
B) engagement
C) undertaking
D) procedure
E) project

Question 43

Accountants may be named as defendants in lawsuits that claim violations of the RICO Act.

Question 44

In a few jurisdictions,an accountant may not be called as a witness against a client in a court action.

Question 45

A plaintiff in an action under Section 11 of the Securities Act of 1933 must prove that she relied on the misstatement of an accountant in order to recover.

Question 46

The 1976 Tax Reform Act imposes civil liability on accountants and others who prepare federal tax returns.

Question 47

Ordinary negligence of an accountant will result in liability under Rule 10b-5 of the Securities Exchange Act of 1934.

Question 48

Which of the following is not one of the requirements for an accountant to become a certified public accountant?

A) educational requirements
B) size of firm requirements
C) passage of the CPA exam
D) minimum period of audit experience

Question 49

An accountant's failure to follow generally accepted auditing standards in conducting an audit generally amounts to:

A) fraud
B) negligence
C) promissory estoppel
D) reliance
E) falsification

Question 50

If an auditor is unable to gather enough information to express an opinion about the financial statements,the auditor would issue a(n):

A) unqualified opinion
B) qualified opinion
C) adverse opinion
D) disclaimer of opinion

Question 51

If an auditor determines that the financial statements fairly present the financial results and position of the client,the auditor would issue a(n):

A) unqualified opinion
B) qualified opinion
C) adverse opinion
D) disclaimer of opinion

Question 52

If an auditor determines that the financial statements do not fairly present the financial results and position of the client,the auditor would issue a(n):

A) unqualified opinion
B) qualified opinion
C) adverse opinion
D) disclaimer of opinion

Question 53

Knowledge of the rule presented in Section 32(a)of the Securities and Exchange Act of 1934 has no impact on whether or not an individual becomes imprisoned.

Question 54

The guidelines that accountants must follow in preparing financial statements are the:

A) generally accepted accounting principles
B) Securities and Exchange Commission Accounting Guidelines
C) generally accepted auditing standards
D) Government Financial Statement Guidelines

Question 55

The due diligence defense is a broad defense available to an accountant for a claim under rule 10b-5 of the Securities Exchange Act of 1934.

Question 56

If an auditor determines that the financial statements fairly present the financial results and position of the client except for one fairly minor,but material,item that is not properly presented,the auditor would issue a(n):

A) unqualified opinion
B) qualified opinion
C) adverse opinion
D) disclaimer of opinion

Question 57

The guidelines that accountants must follow in conducting an audit are the:

A) generally accepted accounting principles
B) Securities and Exchange Commission Auditing Rules and Procedures
C) the Department of Treasury Audit Processes
D) generally accepted auditing standards

Question 58

Which of the following is not typically a common law basis of liability to the client of an accountant?

A) fraud
B) breach of contract
C) negligence
D) strict liability

Question 59

Section 18(a)of the Securities Exchange Act of 1934 imposes liability on accountants making a false or misleading statement in any document filed with the Securities and Exchange Commission.

Question 60

The procedure that an accountant performs to determine whether the financial statements of a business are materially accurate is a(n):

A) review
B) audit
C) compilation
D) verification
E) account sampling

Question 61

Under the Restatement (Second)of Torts standard,an accountant is liable to which third parties for negligence?

A) Only parties in privity with the accountant.
B) Only parties in privity with the accountant or parties in a privity-like relationship with the accountant.
C) All parties in a limited class whose identities are known by the accountant.
D) All parties in a limited class whether or not the accountant knows the identity of the party.
E) All foreseeable users of the financial statements.

Question 62

Which of the following is true about the accountant-client privilege?

A) It applies in federal courts and all state courts.
B) It applies in all state courts,but not in federal court.
C) It applies in federal court and some state courts.
D) It applies in some state courts,but not in federal court.
E) It applies in federal court,but no state courts.

Question 63

An accountant is liable for unintentional negligent misstatements in financial statements under which of the following?

A) Section 11 of the Securities Act of 1933
B) Section 10(b) of the Securities Exchange Act of 1934
C) Both A and B
D) Neither A nor B

Question 64

Under the rules of Section 10A of the Securities Exchange Act of 1994,if an auditor detects an illegal act having a material effect on the financial accounts,to whom must the accountant first report the finding?

A) the client's management and audit committee
B) the client's board of directors
C) the Securities and Exchange Commission
D) the client's shareholders

Question 65

Under the Ultramares doctrine,an accountant is liable to which third parties?

A) Only parties in privity with the accountant.
B) Only parties in privity with the accountant or parties in a privity-like relationship with the accountant.
C) All parties in a limited class whose identities are known by the accountant.
D) All parties in a limited class whether or not the accountant knows the identity of the party.
E) All foreseeable users of the financial statements.

Question 66

On which of the following theories under common law can an accountant be held liable to parties with whom the accountant is not in privity?

A) breach of contract
B) fraud
C) breach of contract or fraud
D) neither breach of contract nor fraud

Question 67

An accountant is liable for negligence only to those parties in a limited class of intended users under which standard of accountant liability to third parties?

A) the Ultramares doctrine
B) the Restatement (Second) of Torts standard
C) the strict liability standard
D) the foreseeability standard
E) the auditing liability standard

Question 68

The state law rule of liability of accountants for negligence to third parties that is least favorable to the accountant is:

A) the Ultramares doctrine
B) the Restatement (Second) of Torts standard
C) the strict liability standard
D) the foreseeability standard

Question 69

An accountant is liable for negligence only to third parties with whom the accountant is in privity or in a privity-like relationship under which standard of liability?

A) the Ultramares doctrine
B) the Restatement (Second) of Torts standard
C) the strict liability standard
D) the foreseeability standard
E) the auditing liability standard

Question 70

How many general rules of liability are there for accountants' liability for negligence to third parties under state law?

A) one
B) two
C) three
D) four
E) five

Question 71

Which of the following is true about the general standard of care owed by an accountant to the client?

A) It varies considerably depending on the geographic region of the nation.
B) It varies considerably depending on the sophistication of the accountant.
C) It varies considerably depending on the sophistication of the client.
D) Both A and B
E) It is generally the same in all parts of the nation for similar circumstances.

Question 72

Which of the following is correct about the process for investigating violations of the securities laws?

A) The Securities and Exchange Commission investigates violations and decides whether to prosecute.
B) The Department of Justice investigates violations and decides whether to prosecute.
C) The Securities and Exchange Commission investigates violations and makes a recommendation to the Department of Justice,which then decides whether to prosecute.
D) The Securities and Exchange Commission investigates violations and makes a recommendation to the Department of Justice,which is then obligated to follow the recommendation of the Securities and Exchange Commission.

Question 73

The state law rule of liability of accountants for negligence to third parties that is most favorable to the accountant is:

A) the Ultramares doctrine
B) the Restatement (Second) of Torts standard
C) the strict liability standard
D) the foreseeability standard

Question 74

Smiley,a CPA,was performing the audit at a client when he noticed that the client did not properly account for certain miscellaneous revenues.These revenues were a small portion of overall revenues,but were nonetheless material to the overall financial statements.What type of opinion should Smiley render on the financial statements?

A) unqualified opinion
B) qualified opinion
C) adverse opinion
D) disclaimer of opinion

Question 75

When an accountant has conducted an audit with reckless disregard for the accuracy of the financial statements,the accountant has committed:

A) privity of the contract
B) constructive fraud
C) actual fraud
D) strict liability carelessness

Question 76

The Private Securities Reform Act of 1995 made what change affecting the liability of professionals in connection with securities?

A) Changed the duty of care for accountants from a local standard to a uniform national standard.
B) Made class action lawsuits by plaintiffs easier to file.
C) Replaced the rule for liability of defendants from joint and several liability to proportionate liability.
D) Made accountants liable for misstatements resulting from constructive fraud.

Question 77

Section 11(a)of the Securities Act of 1933 imposes civil liability on accountants for:

A) making misstatements or omissions in a registration statement
B) failing to find misstatements or omissions in a registration statement
C) Both A and B
D) Neither A nor B

Question 78

The due diligence defense is applicable to actions filed under:

A) Section 11 of the Securities Act of 1933
B) Section 10(b) of the Securities Exchange Act of 1934
C) Both A and B
D) Neither A nor B

Question 79

When an accountant has not followed generally accepted auditing standards,which of the following is true?

A) The accountant is negligent.
B) The accountant is presumed to be negligent,but the accountant can possibly rebut that presumption.
C) The accountant will be liable for any losses suffered by users of the financial statements.
D) The accountant will lose his license to practice the profession of accountancy.

Question 80

When an accountant has followed generally accepted auditing standards and generally accepted accounting principles,which of the following is true?

A) The accountant is not negligent.
B) The accountant could be negligent in some other respect.
C) The accountant will not be liable for any losses suffered by users of the financial statements.
D) The accountant will have uncovered any fraud or other problems with the financial statements.