Deck 42: Professional Liability and Accountability

Question 1

An auditor who agrees to examine a client's records for fraud and then fails to detect it is not liable because a normal audit is not intended to uncover fraud.

Answer 1

False

Question 2

In general, professionals should discharge their professional responsibilities to the best of their ability.

Answer 2

True

Question 3

Despite a professional's breach of contract, the non-breaching client cannot obtain, as damages, the cost of penalties for failing to meet deadlines.

Answer 3

False

Question 4

In some states, a party can recover from an accountant for negligence only outside an accountant-client relationship.

Question 5

An attorney's commission of a crime constitutes professional misconduct even absent proof that it reflects adversely on the person's fitness as a lawyer.

Question 6

To hold a professional liable for negligence, a plaintiff must show that a duty of care existed and it was breached-proof of an injury is not required.

Question 7

An auditor who accepts a client's explanation regarding financial irregularities, despite contradictory evidence, could be considered grossly negligent.

Question 8

In view of the reliance of numerous parties on the opinions of auditors, many courts have ceased to hold accountants liable to third parties for negligence.

Question 9

An accountant who fails to perform for a client as agreed has breached their contract, and the client has the right to pursue a claim for damages.

Question 10

A professional can be held liable for constructive fraud whether or not he or she acted with fraudulent intent.

Question 11

In some states, in the absence of privity, or a similarly close relationship, a party cannot recover from an accountant for negligence.

Question 12

The importance of abiding by the standards of a profession is highlighted whenever a professional fails to adhere to those standards.

Question 13

Professionals are faced with a decreasing threat of liability as the public becomes more aware that professionals must deliver competent services.

Question 14

In performing professional services, an accountant is subject to the standard of the ordinarily prudent person.

Question 15

Under rules of professional conduct that proscribe fraud, state authorities can discipline professionals for engaging in such misconduct.

Question 16

Negligence cases against professionals often focus on the standard of care exercised by the professional.

Question 17

An accountant who conforms to generally accepted auditing standards and acts in good faith will most likely not be liable to a client for incorrect judgment.

Question 18

An accountant who uncovers suspicious financial dealings in a client's books and fails to investigate or to inform the client is liable for any resulting loss.

Question 19

A professional who is sanctioned by a court for fraudulent conduct cannot also be penalized by a state board of professional ethics.

Question 20

An accountant who fails to discover every impropriety in a client's books is liable to the client on a negligence theory for any resulting loss.

Question 21

Manufacturing Inc. hires Neri, an accountant, to maintain the company's financial records. Neri does not act negligently or fail to perform any duty but fails to discover that Ollie, the firm's chief finance officer, is embezzling funds from the firm. With respect to the corporation's losses, the accountant is

A)not liable.
B)liable for the entire amount.
C)liable only for the amount that occurred after the accountant was hired.
D)liable only for the amount that cannot be recovered from the embezzler.

Question 22

An accountant should destroy working papers on the completion of an audit to avoid the possibility of having to provide evidence in a suit in which the accountant's competence is challenged.

Question 23

Once an attorney-client relationship arises, to encourage frankness, all communications between the parties are privileged.

Question 24

An accountant is least likely to be held liable for accounting fraud if he or she

A)uncovers suspicious financial transactions but does not inform the client.
B)fails to discover every impropriety in a client's books.
C)reports fictitious revenues in a client's financial statement.
D)conceals liabilities or debts, or artificially inflates assets, for a client.

Question 25

An accountant is liable for any omission in a registration statement to a person who suffers a loss on the securities described in the statement.

Question 26

"A reasonably competent general practitioner of ordinary skill, experience, and capacity" is the normal standard of performance expected of

A)none of the choices.
B)an accountant.
C)an attorney.
D)a client.

Question 27

In some states, an accountant is potentially liable to any user who relies on the professional's statement or report whether or not the reliance was foreseeable.

Question 28

Because of the potential for significant losses to sellers and buyers, under both of the federal securities acts liability is imposed on accountants for all acts of negligence, including "mere" negligence.

Question 29

Under the Private Securities Litigation Reform Act, an accountant who participates in, but is unaware of, illegal conduct may be liable for proportionately less than the entire loss.

Question 30

The Public Company Accounting Oversight Board oversees the audit of public companies subject to securities laws in order to protect public investors.

Question 31

An attorney who becomes aware that a client has violated securities laws must report the violation to the Securities Exchange Commission-which creates a potential conflict with the attorney-client privilege.

Question 32

An accounting firm can lawfully perform both auditing and non-auditing services for the same company at the same time because the firm could otherwise be exposed to potentially massive liability.

Question 33

It is a felony for anyone-not just accountants-to willfully make false statements in a tax return or to willfully assist others in preparing a false return.

Question 34

Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year.

Question 35

To avoid liability for securities violations, an accountant must use due diligence in preparing a financial statement included in a registration statement-merely asking questions of a corporate officer or director meets this standard.

Question 36

Dena, an accountant, contracts to perform services for Equipment Maker Inc. Dena acts in good faith and conforms to generally accepted accounting principles but makes an incorrect judgment. Dena is most likely

A)liable for negligence.
B)liable for breach of contract.
C)liable for a violation of state professional ethical standards.
D)not liable.

Question 37

In most states, an attorney may be liable for negligence to a non-client who the attorney knows or reasonably should know will rely on the attorney's opinion.

Question 38

Because working papers are the property of an accountant, a client for whom the documents were used and developed has no right of access to them.

Question 39

Bell, an accountant, enters into a contract to provide services to Consumer Staples Inc. Bell fails to meet a regulatory deadline for the work. Required to pay a fine, the company files a suit against Bell. Most likely, the court will order

A)Bell to pay the amount of the fine as damages to the firm.
B)Bell to meet the next deadline but not to pay damages.
C)Consumer Staples to drop its suit and pay its fine.
D)Consumer Staples to secure another professional to finish the work.

Question 40

In most states, accountants are subject to liability for negligence not only to their clients but also to foreseen or known users of the accountants' reports.

Question 41

Del, an accountant, prepares for Econo Inc. a financial statement that omits a material fact. The statement is included in Econo's registration statement filed with the Securities and Exchange Commission. Fran, who relies the statement, and Gib, who does not, each buy Econo stock. Under Section 11 of the Securities Act of 1933, Del may be liable to

A)no one.
B)Fran only.
C)Fran and Gib.
D)Gib only.

Question 42

Regarding a professional, malpractice is

A)competence.
B)repetition.
C)preparation.
D)negligence.

Question 43

Enya is an attorney whose clients include Finance Company. If Enya is negligent in her work for Finance, under the Restatement (Third)of Torts , she may be liable to the client and

A)any third party.
B)no third party.
C)third parties who are foreseen users of the work.
D)third parties who are reasonably foreseeable users of the work.

Question 44

Bee is an accountant whose clients include Concessions Inc. If Bee is negligent in her work for Concessions, most courts would hold her liable to the client and

A)any third party.
B)no third party with whom the accountant is not in privity or "near privity."
C)third parties who are foreseen users of the work.
D)third parties who are reasonably foreseeable users of the work.

Question 45

Norm is an accountant. With respect to an allegation of negligence by Online Retail Inc., one of Norm's clients, Norm's violation of generally accepted accounting principles and generally accepted auditing standards

A)does not indicate that Norm was negligent.
B)is prima facie evidence that Norman was negligent.
C)precludes Norm from raising any defense against a negligence claim.
D)relieves Norm of any legal liability but not professional ethics sanctions.

Question 46

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

A)actual fraud.
B)constructive fraud.
C)destructive fraud.
D)virtual fraud.

Question 47

Ben is an accountant whose clients include Capital Inc. Under the Ultramares rule, if Ben is negligent in his work for Capital, he could be liable to the client and

A)any third party.
B)no third party with whom the accountant is not in privity or "near privity."
C)third parties who are foreseen users of the work.
D)third parties who are reasonably foreseeable users of the work.

Question 48

Frye, an accountant, intentionally misstates a material fact to mislead Global Industries Inc., a client. Global justifiably relies on the misstatement to its detriment. Frye is most likely liable for

A)fraud.
B)malpractice.
C)negligence.
D)none of the choices.

Question 49

Lou, an attorney, allows a statute of limitations to lapse on a claim by Metal Fabrication Company, a client. Lou

A)can be held liable for malpractice.
B)has violated an ethical standard but cannot be held liable.
C)is subject to criminal penalties under the statute of limitations.
D)will be automatically disbarred.

Question 50

Auto Company's liabilities exceed its assets. The firm hires Bass, an accountant, to prepare a balance sheet. Through negligent omissions, the sheet shows a net worth. Credit Bank relies on the document to make a loan to Auto. When the firm defaults, the bank files a suit against Bass. Under the Restatement (Third)of Torts , Bass is most likely

A)liable because the accountant owed a duty to the client.
B)liable because the accountant owed a duty to any foreseeable user.
C)liable if the accountant knew the bank would rely on the balance sheet.
D)not liable because accountant and the bank were not in privity.

Question 51

Gen & Hetty is a Registered Public Accounting Firm. The firm performs auditing services for Healthcare Company. Under the Sarbanes-Oxley Act, at the same time, for the same company, Gen & Hetty can also perform

A)bookkeeping.
B)none of the choices.
C)appraisal services.
D)financial systems design.

Question 52

An attorney's conduct is governed by rules of professional conduct established by the state in which he or she is licensed, and the Model Rules of Professional Conduct of

A)the Securities and Exchange Commission.
B)the American Bar Association.
C)the American Law Institute.
D)the International Professional Standards Board.

Question 53

Galen prepares a financial statement for Hobby Inc. before a public offering of its stock. The Securities and Exchange Commission orders a revision of the statement. During the subsequent delay of the offering, the stock price drops. Hobby files a suit against Galen for negligence. Galen's best defense is

A)even if the accountant was negligent, this was not the proximate cause of the drop in the stock price.
B)the firm suffered no injury.
C)the accountant did not breach any duty of care that it owed to the firm.
D)the accountant owed no duty of care to the firm.

Question 54

Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable

A)if Commerce Bank cannot prove actual fraud.
B)if Drake was grossly negligent in the performance of his duties.
C)only if Drake acted with fraudulent intent.
D)only if Drake impersonated someone who could be liable for fraud.

Question 55

Carbon Company's liabilities exceed its assets. The firm hires Dobie, an accountant, to certify a balance sheet showing a positive net worth. Equity Bank relies on the balance sheet to make a loan to Carbon. The firm defaults. Under the Ultramares rule, Dobie is most likely not liable because he

A)did not owe a duty of care to any third party.
B)is not responsible for his client's finances.
C)finished his work before the loan and default.
D)was not in privity with the bank.

Question 56

Rico, an accountant, contracts to conduct an audit for Sushi Restaurants. In performing the audit, Rico fails to detect a Sushi employee's obvious theft of funds from the firm. Rico is most likely

A)liable if a normal audit would have revealed the theft.
B)liable if the accountant failed to issue a qualified opinion with the audit.
C)not liable because a normal audit is not intended to discover fraud.
D)not liable if the theft was due to Sushi's negligence.

Question 57

Hoki, an accountant, accumulates working papers while performing an audit for Insurance Corporation. After the audit, these documents belong to

A)the accountant, with the client having a right of access to the papers.
B)the client, with the accountant having a right of access to the papers.
C)the Public Company Accounting Oversight Board.
D)no one-the papers should be destroyed immediately after use.

Question 58

Haji is an accountant charged with negligence by Infrastructure Service Inc., a client. Haji may successfully defend against the claim if he can show

A)scienter was lacking.
B)compliance with all International Financial Reporting Standards.
C)the accountant was not negligent.
D)any negligence on the accountant's part was only contributory.

Question 59

Ty is an accountant whose clients include United Corporation. Working papers that Ty develops when preparing financial reports for United are owned by

A)Ty.
B)United.
C)the Securities and Exchange Commission.
D)no one-the papers should be destroyed immediately after use.

Question 60

Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove

A)misstatement of a material fact.
B)intent to deceive.
C)justifiable reliance.
D)an injury.

Question 61

Rand, an accountant, includes a false statement in a report for Social Media Inc. that is filed with the Securities and Exchange Commission. When Teo buys stock in Social Media and loses money on the investment, he files a suit against Rand, alleging fraud under the 1934 Securities Exchange Act. To avoid liability, Rand can show that he

A)intended to defraud Social Media, not Teo.
B)intended to profit on stock trades generally, not only Teo's.
C)is an otherwise competent accountant.
D)had no knowledge that the statement was false.

Question 62

Reliant Inc. files a suit against Saul, an accountant, under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. To succeed, Reliant must show that Saul

A)acted with scienter .
B)bought or sold a security.
C)is incompetent.
D)knows nothing about securities .

Question 63

Herb, an accountant, helps Industrial Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is

A)a felony punishable by a fine and imprisonment.
B)no violation.
C)a misdemeanor punishable only by a fine.
D)a civil violation subject to a liability suit but not a crime.

Question 64

Finola, a certified public accountant, provides accounting services to Global Trade Corporation. The services include preparing Global Trade's financial reports and issuing opinion letters based on the reports. In 2014, Global Trade falls into serious financial trouble, but neither Finola's reports nor her opinion letters indicate this situation. Relying on Finola's portrayal of Global Trade's financial situation, the firm borrows a large sum of money to build a new shipping facility. In lending Global Trade the money, Harbor City Bank relies on Finola's opinion letter. Finola is aware of this reliance. If Finola did not engage in intentional fraud but was negligent, what is her potential liability?

Question 65

Marco is an accountant who prepares his clients' tax returns. Nell is not an accountant, but she also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on

A)Marco and Nell.
B)Marco only.
C)Nell only.
D)none of the choices.

Question 66

Reed prepares federal corporate income tax returns for Shopping Mall Inc. and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for

A)negligent or willful misconduct.
B)no misconduct.
C)only negligent misconduct.
D)only willful misconduct.

Question 67

Sims, an accountant, prepares for Taco Corporation a financial statement that omits a material fact. The financial statement is included in Taco's registration statement, which Uri reads. Uri buys Taco stock. Under Section 11 of the Securities Act of 1933, for Sims to be liable for the omission, Uri must show that he

A)relied on the omission.
B)suffered a loss on the stock.
C)knew about the omission before making the purchase.
D)is a sophisticated investor.

Question 68

Silva prepares federal corporate income tax returns for Trade Stores Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Silva may be liable for

A)negligent or willful misconduct.
B)none of the choices.
C)only negligent misconduct.
D)only willful misconduct.

Question 69

Miriam is an accountant. Natalie is an attorney. Which professional is most restricted from disclosing her or his client's communication?

Question 70

Cliff is an attorney whose clients include Data Inc. Unless Data has violated securities law, the contents of Cliff's file on the firm may be disclosed to a third party

A)under no circumstances.
B)only under a court order (with or without Data's consent).
C)only with Data's consent.
D)at Cliff's discretion.

Question 71

Cath is an accountant with Discount Corporation. Efrem buys Discount stock and loses money on the investment. To recover from Cath under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove

A)only the purchase and sale of a security.
B)fraud, reliance, materiality, and lack of knowledge about securities.
C)fraud, reliance, materiality, and incompetence.
D)fraud, reliance, materiality, causation, and scienter .

Question 72

Leisure Inc.'s accountant is Mel and the firm's attorney is Nola. All states protect, as privileged information, Leisure's communications with

A)Mel and Nola.
B)Mel only.
C)Nola only.
D)none of the choices.