Deck 27: Accountants' Duties and Liability

Question 1

A(n)________ opinion is an auditor's opinion that the company's financial statements fairly represent the company's financial position,the results of its operations,and the change in cash flows for the period under audit,in conformity with generally accepted accounting principles.

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

Answer 1

D

Question 2

The ________,an organization created by the accounting profession,issues new GAAP rules and amends existing rules.

A)Financial Accounting Standards Board (FASB)
B)International Accounting Standards Board (IASB)
C)International Financial Reporting Board (IFRB)
D)American Institute of Certified Public Accountants (AICPA)

Answer 2

A

Question 3

________ specify the methods and procedures that are to be used by public accountants when conducting external audits of company financial statements.

A)Generally accepted accounting principles
B)Generally accepted auditing standards
C)Auditors' expert opinions
D)General engagements and agreements

Answer 3

B

Question 4

Which of the following is the form of business ownership used by most public accounting firms?

A)limited liability partnership
B)C corporation
C)S corporation
D)general partnership

Question 5

Most public accounting firms operate as limited liability partnerships (LLPs).

Question 6

A person who practices as an accountant but is not certified is referred to as a public accountant.

Question 7

Which of the following opinions is necessary for a company to avoid unfavorable consequences (for example,not being able to sell its securities to the public)?

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

Question 8

Accountants who meet certain educational requirements,pass the CPA examination,and have a certain number of years of auditing experience are called ________.

A)certified public accountants
B)central private accountants
C)central public accountants
D)certified private accountants

Question 9

Monica is an accountant with Mildred & Lane Inc. ,and she has recently been asked to visit Maine Manufacturers to survey their financial records,assess their compliance with federal and state laws,and provide an opinion reflecting the state of the company's financial records.Monica's assessment of the financial records of Maine Manufacturers is called a(n)________.

A)probate
B)audit
C)arraignment
D)easement

Question 10

Standards for the preparation and presentation of financial statements are known as ________.

A)engagements and agreements
B)auditors' opinions
C)generally accepted accounting principles
D)generally accepted auditing standards

Question 11

________ is defined as the intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damage.

A)An unqualified opinion
B)Actual fraud
C)A disclaimer of opinion
D)Constructive fraud

Question 12

Which of the following statements is true of Generally Accepted Accounting Principles (GAAP)?

A)They are used by auditors as a guide,but only for non-audit services.
B)They are accepted and applied by accounting firms globally.
C)They cannot be modified once initially established by the American Institute of Certified Public Accountants.
D)They establish rules for how corporations and accounting firms prepare financial statements.

Question 13

Which of the following statements is true of accountants?

A)Accountants who pass the CPA examination are called private noncertified accountants.
B)Accountants cannot be held liable by provisions of common law.
C)Accountants cannot be held liable to clients and third parties.
D)Accountants who lack CPA certification are called public accountants.

Question 14

A formal entrance into a contract between a client and an accountant is known as an ________.

A)abatement
B)arraignment
C)easement
D)engagement

Question 15

A(n)________ is an auditor's opinion that the financial statements are fairly represented except for,or subject to,a departure from GAAPs,a change in accounting principles,or a material uncertainty.

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

Question 16

Limited partners are personally liable for the debts and obligations of the limited liability partnership.

Question 17

Which of the following opinions would an auditor make for a company that has materially misstated certain items on its financial statements?

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

Question 18

Which of the following is the most favorable opinion an auditor can give a company following an audit?

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

Question 19

Which of the following is true of an auditor of a corporation?

A)The auditor must be an independent certified public accountant.
B)The auditor cannot use information about the corporation from third parties.
C)The auditor cannot inspect the corporation's real property unless he or she is closely associated with the company.
D)The auditor must provide a qualified opinion wherever possible,since it helps the company in its business practices.

Question 20

If an auditor makes a disclaimer of opinion,this means that the auditor ________.

A)generally agrees that the company's financial records accurately represent the company's financial position,but notes a few departures from GAAPs
B)disagrees that the company's financial records accurately represent the company's financial position
C)cannot draw a conclusion about the accuracy of the company's financial records,generally due to a lack of sufficient information about the records
D)agrees that the company's financial records accurately represent the company's financial position

Question 21

The Ultramares doctrine is the broadest standard for holding accountants liable to third parties for negligence.

Question 22

Probate is defined as the verification of a company's books and records by a certified accountant.

Question 23

The issuance of an unqualified opinion means that the company's financial statements are not in conformity with GAAPs.

Question 24

Which of the following rules provides that an accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client's financial statements?

A)Section 552 of the Restatement (Second)of Torts
B)the foreseeability standard
C)the Ultramares doctrine
D)the due diligence defense

Question 25

Pursuant to federal securities laws,an audit must be performed by a CPA who works as the chief executive officer (CEO)or chief financial officer (CFO)of the company being audited.

Question 26

Violations of GAAPs or GAASs,or IFRSs,if applicable,are prima facie evidence of negligence,although compliance does not automatically relieve the accountant of such liability.

Question 27

Generally Accepted Accounting Principles (GAAPs)specify the methods and procedures that are to be used by public accountants when conducting external audits of company financial statements.

Question 28

Accountants can be held liable for negligence in preparing unaudited financial statements.

Question 29

Which of the following standards have most states adopted regarding accountant liability for negligence to third parties?

A)the Ultramares doctrine
B)the foreseeability standard
C)Section 552 of the Restatement (Second)of Torts
D)the due diligence standard

Question 30

________ is a rule that says that an accountant is liable only for negligence to third parties who are in privity of contract or in a privity-like relationship with the accountant.

A)The foreseeability standard
B)The Ultramares doctrine
C)The due diligence defense
D)Section 552 of the Restatement (Second)of Torts

Question 31

The Financial Accounting Standards Board (FASB)issues new GAAP rules and amends existing ones.

Question 32

An adverse opinion is usually issued when an auditor determines that a company has materially misstated certain items on its financial statements.

Question 33

An accountant's failure to follow GAASs when conducting audits constitutes negligence.

Question 34

Constructive fraud is defined as the intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damage.

Question 35

A disclaimer of opinion is a corporate auditing exemption that effectively prohibits an auditor from accessing a high-priority portion of the company's financial records.

Question 36

A formal entrance into a contract between a client and an accountant is called an abatement.

Question 37

Generally Accepted Auditing Standards (GAASs)are established by the American Institute of Certified Public Accountants.

Question 38

In Ultramares Corporation vs.Touche,the court found the defendant accounting firm not liable for negligence due to the plaintiff's lack of privity of contract or a privity-like relationship with the defendant.

Question 39

A qualified opinion is the most favorable opinion that an accountant can render.

Question 40

When does an auditor submit a disclaimer of opinion? What is the significance of an auditor's opinion?

Question 41

Under the foreseeability standard,an accountant is liable even if he or she had no knowledge of the intended user of the audited financial statements.

Question 42

Explain Section 552 of the Restatement (Second)of Torts.

Question 43

The legal standard that holds an accountant liable for his or her negligence to any member of a limited class of intended users for whose benefit the accountant has been employed is Section 552 of the Restatement (Second)of Torts.

Question 44

________ imposes civil liability on accountants and others for making misstatements or omissions of material facts in a registration statement or failing to find such misstatements or omissions.

A)Section 11(a)of the Securities Act of 1933
B)Section 10A of the Securities Exchange Act of 1934
C)Section 101 of the Uniform Securities Act
D)Section 18(a)of the Securities Exchange Act of 1934

Question 45

When an accountant has behaved negligently causing damage to a third party,the third party ________.

A)can claim privity of contract with the accountant
B)cannot bring a tort action against the accountant
C)cannot sue the accountant for breach of contract
D)cannot sue the accountant for constructive fraud

Question 46

Which of the following can an accountant use as a defense to liability under Section 11(a)of the Securities Act of 1933?

A)the nolo contendere rule
B)the due diligence defense
C)the Ultramares doctrine
D)the foreseeability standard

Question 47

Which of the following is the broadest standard for holding accountants liable to third parties for negligence?

A)Section 552 of the Restatement (Second)of Torts
B)the foreseeability standard
C)the Ultramares doctrine
D)the due diligence doctrine

Question 48

Third parties usually cannot sue accountants for breach of contract.

Question 49

Which of the following is true of Rule 10b-5?

A)Privity of contract is necessary for filing a lawsuit under this rule.
B)Civil lawsuits are not permitted under this rule.
C)Only purchasers and sellers of securities can sue under this rule.
D)Ordinary negligence is a violation of this rule.

Question 50

The ________ Act of 1976 specifically imposes penalties and fines on accountants and others who prepare federal tax returns for the willful understatement of a client's tax liability.

A)Tax Reform
B)Racketeer Influenced and Corrupt Organizations
C)Private Taxation Litigation Reform
D)Uniform Securities

Question 51

Which of the following legislation makes it a criminal offense to willfully make any untrue statement of material fact in a registration statement filed with the SEC?

A)Section 24 of the Securities Act of 1933
B)the Tax Reform Act of 1976
C)the Private Securities Litigation Reform Act of 1995
D)Section 10(b)of the Securities Exchange Act of 1934

Question 52

________ is a rule that limits the liability of an accountant or other securities professional to his or her personal degree of fault.

A)Privity of contract
B)The due diligence defense
C)Proportionate liability
D)The Ultramares doctrine

Question 53

Accountants can be found liable for violating Section 18(a)of the Securities Exchange Act of 1934 since ________.

A)they often file reports and other documents with the SEC on behalf of clients
B)CPAs are directly employed by the SEC
C)all companies require an accountant's approval before buying securities from the SEC
D)securities can only be bought through a CPA

Question 54

A verification of a company's books and records pursuant to federal securities laws,state laws,and stock exchange rules that must be performed by an independent CPA is known as a(n)________.

A)probate
B)ademption
C)audit
D)deposition

Question 55

Which of the following is true of Section 10A of the Securities Exchange Act of 1934?

A)It prohibits manipulative or deceptive practices in probate.
B)It is a due diligence defense an accountant can assert to avoid civil liability.
C)It imposes duties on auditors to detect and report illegal acts committed by their clients.
D)It imposes criminal liability on accountants for making material misstatements or omissions in their performance of non-audit services.

Question 56

In which of the following ways can an accountant avoid liability under Section 18(a)of the Securities Exchange Act of 1934?

A)if the accountant can show that the misleading statement was made to protect the company from Chapter 7 or Chapter 11 bankruptcy
B)if the accountant acted recklessly,rather than negligently
C)if the accountant had served as the plaintiff's employee within 180 days before the filing of the Section 18(a)action
D)if the accountant can show that the plaintiff had knowledge of the false statement when the securities were purchased or sold

Question 57

________ is a law that prohibits any manipulative or deceptive practice in connection with the purchase or sale of a security.

A)Section 11(a)of the Securities Act of 1933
B)Section 32(a)of the Securities Exchange Act of 1934
C)Section 10(b)of the Securities Exchange Act of 1934
D)Section 101 of the Uniform Securities Act

Question 58

A third party can bring a tort action against an accountant for constructive fraud.

Question 59

A rule that says that an accountant is liable for negligence to third parties who are foreseeable users of the client's financial statements is known as ________.

A)the foreseeability standard
B)the Ultramares doctrine
C)the due diligence defense
D)Section 552 of the Restatement (Second)of Torts

Question 60

Which of the following is required to bring a civil action for securities fraud against a violator of RICO?

A)The accountant must not be a third-party independent contractor.
B)The defendant must first be criminally convicted in connection with the securities fraud.
C)The plaintiff must file the civil case before the government initiates a criminal action.
D)The defendant must first be tried for violation of Section 32(a)of the Securities Exchange Act of 1934.

Question 61

Only purchasers and sellers of securities can sue under Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934.

Question 62

Federal law allows for discovery of an accountant's work papers in a federal case against the accountant's client.

Question 63

Ordinary negligence by an accountant is not a violation of Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934.

Question 64

Persons injured by a RICO violation can bring a private civil action against the violator and recover treble damages.

Question 65

Which of the following is true of the Public Company Accounting Oversight Board (PCAOB)?

A)All members of the PCAOB must be CPAs.
B)The PCOAB was created by the Tax Reform Act of 1976.
C)The SEC has oversight and enforcement authority over the PCOAB.
D)The PCOAB does not have any disciplinary authority over accountants and accounting firms.

Question 66

The Private Securities Litigation Reform Act of 1995 replaced proportionate liability of the defendant with joint and several liability.

Question 67

The SEC has the independent power to criminally prosecute and imprison an offending party for violations of Section 32(a)of the Securities Exchange Act of 1934.

Question 68

All members of the Public Company Accounting Oversight Board (PCAOB)must be CPAs.

Question 69

Under the Sarbanes-Oxley Act,in order to audit a public company,________.

A)only public accountants can serve as members of the audit committee
B)a public accounting firm must register with the PCAOB
C)a public accounting firm must assign as members of the audit committee only accountants who have worked closely with the company being audited for three years or longer
D)the accountant-client privilege must be recognized by the state legislature of the state in which the audit will occur

Question 70

Give an account of the Private Securities Litigation Reform Act of 1995.

Question 71

Which of the following legislation provides for both criminal and civil penalties (including treble damages)for securities fraud by accountants and other professionals?

A)the Private Securities Litigation Reform Act of 1995
B)Section 32(a)of the Securities Exchange Act of 1934
C)the Tax Reform Act of 1976
D)the Racketeer Influenced and Corrupt Organizations Act

Question 72

________ provides that an accountant's work papers cannot be used against his or her client in a court action.

A)Work product immunity
B)The accountant-client privilege
C)The foreseeability standard
D)The Noerr Doctrine

Question 73

The Tax Reform Act of 1976 created the Public Company Accounting Oversight Board (PCAOB).

Question 74

A due diligence defense cannot be asserted by an accountant against the civil liabilities of Section 11(a)of the Securities Act of 1933.

Question 75

The accountant-client privilege provides that ________.

A)only an accountant can serve as a witness for his or her client in a court action
B)an accountant's paperwork be used as prima facie evidence against his or her client in a court action
C)an accountant cannot be called as a witness against his or her client in a court action
D)an accountant does not enjoy work product immunity when his or her client is accused of gross negligence

Question 76

Accountants can be named as defendants in lawsuits that assert violations of the Racketeer Influenced and Corrupt Organizations Act (RICO).

Question 77

According to the Sarbanes-Oxley Act of 2002,any person who is employed by a public accounting firm that audits a client cannot be employed by that client as the chief executive officer (CEO)or chief financial officer (CFO)for a period of five years following the audit.

Question 78

Accountants cannot be held criminally liable for material irregularities in financial statements prepared for registration statements.

Question 79

The SEC has oversight and enforcement authority over the Public Company Accounting Oversight Board (PCAOB).

Question 80

The Securities Act of 1933 requires that before a corporation or another business sells securities to the public,the issuer must file a registration statement with the Securities and Exchange Commission (SEC).