Deck 2: Auditors’ legal environment

Question 1

The Financial Reporting Council (FRC):

A) is the authority for producing auditing standards.
B) monitors individual auditors.
C) monitors individual engagements.
D) can seek information about disciplinary actions.

Answer 1

A

Question 2

Sections 324CE-324CH list specific conditions of contraventions of the independence requirements.The specific conditions include circumstances where the auditor:

A) is an officer of the client company.
B) is an audit-critical employee of the client company.
C) has an investment in the company.
D) all of the above

Answer 2

D

Question 3

To be appointed as the auditor of a corporation under the Corporations Act 2001, the relevant person must be a registered company auditor or an authorised audit company.Which of the following are criteria for registration by ASIC?

A) An individual must satisfy requirements in relation to his or her educational qualifications.
B) Requirements established in s. 1280 of the Corporations Act.
C) An individual must satisfy requirements in relation to his or her character.
D) All of the above

Answer 3

D

Question 4

The activities and duties of auditors may be subject to considerable statutory direction or influences, including:
1)Crimes Act 1914
2)Trade Practices Act 1974
3)Corporations Act 2001
4)Auditor Independence Act 2004

A) 1, 2, & 4
B) 1, 2, & 3
C) 1, 3, & 4
D) 1, 2, 3, & 4

Question 5

Professionals have long had a legal duty to provide a reasonable level of care while performing work for those they serve because:

A) it is an implied part of the contract entered into by any professional and his or her client.
B) professional standards require it.
C) the criminal law of fraud requires it.
D) all of the above

Question 6

Auditing is highly regulated, subject to many regulatory influences, including:
1)professional bodies
2)stock exchanges
3)government regulatory agencies
4)state and federal legislation

A) 1, 2, & 4
B) 1, 2, & 3
C) 1, 3, & 4
D) 1, 2, 3, & 4

Question 7

Which country is responsible for the passage of the Sarbanes-Oxley Act of 2002?

A) Australia
B) England
C) Canada
D) United States

Question 8

While performing services for their clients, auditors, as professionals, have a duty to provide a level of care which is:

A) free from judgement errors.
B) superior to that of other auditors.
C) reasonable.
D) greater than the average auditor.

Question 9

In rare cases, auditors have been held liable for criminal acts.A criminal conviction against an auditor can result only when it is demonstrated that the auditor:

A) caused a financial loss to an innocent third party.
B) was negligent.
C) employed a negligent assistant.
D) was involved knowingly in the presentation of False financial statements.

Question 10

Auditors are affected by laws that have been developed by passage through governmental agencies.These are referred to as:

A) common law.
B) statutory law.
C) federal law.
D) judicial law.

Question 11

Auditors should understand their obligations to clients and third parties under:
1)contract law
2)common law
3)trade practices
4)corporations and securities statutes

A) 1, 2, & 4
B) 1, 2, & 3
C) 1, 3, & 4
D) 1, 2, 3, & 4

Question 12

Which area of auditing is NOT affected by statutory regulation?

A) auditing standards
B) auditor independence
C) monitoring of auditors
D) All areas of auditing are affected.

Question 13

The Financial Reporting Council's functions include monitoring the adequacy of systems to ensure the adequacy of:

A) professional bodies disciplinary procedures.
B) auditor independence.
C) professional bodies quality assurance reviews.
D) all of the above

Question 14

Which one of the following statements is correct about criminal actions brought against auditors in Australia?

A) They have resulted in substantial damages being awarded when they have been successful.
B) None has resulted in prison sentences.
C) They have often failed due to lack of causation.
D) They have been few in number.

Question 15

The statutory requirements for independence mean an auditor is prohibited from engaging in audit activity if:

A) the auditor is aware of a conflict of interest situation in relation to the client but doesn't take all reasonable steps to resolve it.
B) the auditor is not aware of a conflict of interest situation in relation to the client and doesn't take all reasonable steps to resolve it.
C) there is a breach of the ethical requirements.
D) there is a breach of the auditor registration requirements.

Question 16

Which entities require rotation of auditors?

A) listed companies
B) listed companies and other disclosing entities
C) charities and other nonprofit organisations
D) all entities who owe money to the Australian Taxation Office

Question 17

A function of the Financial Reporting Council (FRC)is to:

A) review particular audits.
B) monitor individual audits and auditors.
C) require information from a professional body about reviews of a particular audit or disciplinary actions against any particular person.
D) all of the above

Question 18

The monitoring of auditors is the primary legal function of:

A) the Financial Reporting Council (FRC).
B) each individual firm (for its own staff).
C) the professional bodies.
D) all of the above

Question 19

Regulators are the composition of:

A) the Auditing and Assurance Standards Board.
B) an entity's audit committee.
C) an entity's board of directors.
D) corporate governance.

Question 20

What are two areas of liability in auditing?

A) professional liability and criminal liability
B) criminal liability and liability under statutory law
C) professional liability and liability under common law
D) criminal liability and corporate liability

Question 21

Tort actions against public accounting firms are more common than breach of contract actions because:

A) the burden of proof is on the auditor rather than on the person suing.
B) the person suing need prove only negligence.
C) there are more torts than contracts.
D) the amounts recoverable are normally larger.

Question 22

It is a criminal offence for an auditor to:

A) conduct an audit without due care.
B) fail to detect material fraud.
C) withhold information from the client.
D) contravene the independence requirements in the Corporations Act.

Question 23

What does NOT result when the auditor issues an erroneous opinion as the result of an underlying failure to comply with the requirements of Australian auditing standards?

A) negligent auditing
B) business failure
C) criminal liability
D) both A and B

Question 24

Contributory negligence:

A) failed as a defence in the AWA case.
B) cannot be used in cases involving a breach of statutory duty.
C) has been interpreted very widely by Australian courts.
D) was successfully argued in the Pacific Acceptance case.

Question 25

Statutory offences of auditors can arise through:

A) making or authorising False or misleading statements.
B) failing to take reasonable steps to ensure that a statement is not False or misleading.
C) both of the above
D) none of the above

Question 26

A 'negligence calculus' has four components.Which of the following is NOT a component?

A) likely seriousness of harm
B) taking precautions to avoid harm
C) taking out insurance against causing harm
D) probability of harm occurring

Question 27

The reasonable person concept establishes in law that:

A) an audit in accordance with auditing standards is subject to limitations and cannot be relied upon for complete assurance that all errors and irregularities will be found.
B) the courts do not require that the auditor become the insurer or guarantor of the accuracy of the statements.
C) the public accounting firm is not expected to be infallible.
D) all of the above

Question 28

An auditor failing to report to ASIC a contravention of the Corporations Act by a client is an example of:

A) a securities violation.
B) criminal liability.
C) a breach of common law.
D) contributory negligence.

Question 29

Many of the major legal cases against public accountants have dealt with:

A) disputes over income tax preparation services.
B) disputes arising in the performance of MAS contracts.
C) audited financial statements.
D) disputes over the accuracy of bookkeeping services.

Question 30

The AWA case and the Pacific Acceptance case discussed:

A) client acceptance.
B) the duty to inform management.
C) privity letters.
D) management representation letters.

Question 31

Under the laws of agency, partners of a public accounting firm may be liable for the works of others on whom they rely.This would NOT include:

A) other public accounting firms engaged to do part of the work.
B) employees of the public accounting firm.
C) employees of the client.
D) specialists called upon to provide technical information to the public accounting firm.

Question 32

The Pacific Acceptance case was significant because it:

A) allowed contributory negligence as a defence for audit failure.
B) dealt with auditors' liability to shareholders.
C) established that liability might exist to third parties.
D) dealt with aspects related to auditors' duties.

Question 33

Which one of the following was NOT a finding in the Pacific Acceptance case?

A) Audit programs should be updated each year.
B) The auditors were entitled to rely on management representations.
C) The auditors failed to use appropriate vouching procedures.
D) Certain discoveries should have been communicated by the auditors to the board of directors.

Question 34

The auditor's duty to inform management about irregularities regardless of materiality was established in which one of the following cases?

A) WA Chip and Pulp Co
B) Pacific Acceptance
C) AWA
D) Kingston Cotton Mills

Question 35

Failure to perform and audit with due care subjects which party to potential criminal liability?

A) the board of directors
B) the audit committee
C) the auditor
D) the internal auditor

Question 36

The London and General Bank Ltd (No.2)case found that auditors have a duty to report to:

A) directors and shareholders.
B) the directors and ASIC.
C) anyone who may rely on the audited financial reports.
D) shareholders.

Question 37

Which of the following is an illustration of auditor's liability to a client?

A) Federal government prosecutes auditor for knowingly issuing an incorrect audit report.
B) Combined group of stockholders sue auditor for not discovering materially misstated financial statements.
C) Bank sues auditor for not discovering that borrower's financial statements are misstated.
D) Client sues auditor for not discovering a theft of assets by an employee.

Question 38

It is clear from s.199A of the Corporations Act that auditors:

A) can design clauses in letters of engagement to exempt or indemnify an auditor from or against any legal liability that would otherwise attach to the auditor.
B) have the defence of contributory negligence available to them.
C) cannot contract out of their duty to client companies.
D) all of the above

Question 39

In third-party suits, which of the auditor's defences contends lack of privity of contract?

A) non-negligent performance
B) absence of causal connections
C) contributory negligence
D) lack of duty

Question 40

That which constitutes reasonable care, skill, and caution in an audit depends on the:

A) particular circumstances of each case.
B) level of audit risk involved.
C) integrity of management.
D) auditing standards existing at the time.

Question 41

The judgement in the Caparo case decreed no auditor liability to a third party because:

A) a duty of care could not be established.
B) no loss was suffered.
C) a breach of duty of care could not be demonstrated.
D) causation could not be established.

Question 42

In connection with the examination of financial statements, an independent auditor could be responsible for failure to detect a material fraud if:

A) the auditor performing important parts of the work failed to discover a close relationship between the treasurer and the cashier.
B) statistical sampling techniques were not used on the audit engagement.
C) the auditor planned the work in a hasty and inefficient manner.
D) the fraud was perpetrated by one trusted client employee, who circumvented the existing internal controls.

Question 43

Which of the following is NOT a test a plaintiff must satisfy in order to recover damages against the auditor?

A) A duty of care was owed.
B) Plaintiff's performance was negligent.
C) A duty of care was breached.
D) Plaintiff suffered losses.

Question 44

An auditor's examination performed in accordance with Australian auditing standard ASA 240 generally should:

A) guarantee that illegal acts will be detected.
B) ensure a review of conditions and events that increase the risk of irregularity.
C) encompass a plan to search actively for illegalities which relate to environmental reporting.
D) be relied upon to disclose violations of client confidentiality.

Question 45

Which one of the following statements is correct about Candler v Crane, Christmas & Co?

A) A special relationship did not exist.
B) There was no liability for financial loss.
C) Losses were not foreseeable.
D) all of the above

Question 46

In the Caparo case, it was stated that the purpose of the audit report is to:

A) only provide information to the company and its shareholders.
B) provide information to third parties.
C) report on the accuracy of the financial statements.
D) all of the above

Question 47

In the Columbia Coffee and Tea case, the auditors were found to owe a duty of care to a third party because:

A) the criteria established in Al Saudi Banque were satisfied.
B) of a statement contained in the auditor's manual.
C) the party and its intended reliance were known.
D) all of the above

Question 48

To succeed in an action against the auditor, the client must be able to show that:

A) the auditor was grossly negligent.
B) there is a close causal connection between the auditor's breach of the standard of due care and the damages suffered by the client.
C) the auditor was fraudulent.
D) there was a written contract.

Question 49

Which document serves as an acknowledgement of a third party's reliance on the audited financial reports for decisions?

A) management representation letter
B) audit engagement letter
C) letter from client's legal counsel
D) privity letter

Question 50

Audit reports are an insufficient basis for financing decisions by a diligent financier because:

A) the audit report is out of date by the time of publication.
B) the auditor might be negligent.
C) an inappropriate audit opinion might be issued as a result of not complying with auditing standards.
D) an unqualified audit opinion might be issued when the financial statements are materially misstated.

Question 51

The notion of proximity:

A) is separate from consideration of reasonable reliance.
B) has a precise legal definition.
C) can relate to nonspecific third parties.
D) is not separate from foreseeability.

Question 52

The Columbia Coffee and Tea judgement:

A) sought to apply a common sense approach.
B) endorsed the judgement made in the AGC case.
C) was applied by the High Court in its Esanda decision.
D) all of the above

Question 53

The AGC case added which one of the following criteria to the tests determining whether a duty of care is owed to a third party?

A) prevailing community standards
B) purpose of reliance must be known
C) intention to induce
D) user must be known

Question 54

In which case was it held that an auditor did not owe a duty of care to potential shareholders?

A) Caparo
B) Cambridge Credit
C) London and General Bank
D) Nelson Guarantee Corp Ltd

Question 55

In the AGC case, the court held the view that communication between AGC and the auditor:

A) established proximity.
B) indicated that reliance was reasonable.
C) was evidence of a necessary special relationship.
D) did not bring about a relationship giving rise to a duty of care.

Question 56

The WA Chip and Pulp Co.case reaffirmed the:

A) importance of auditor independence.
B) duty to investigate suspicions of fraud regardless of its materiality.
C) duty to conduct the audit with reasonable care and skill.
D) duty to inform management if there is a suspicion of a material fraud.

Question 57

In the Esanda Finance Corporation Ltd v Peat Hungerfords case, the court:

A) confirmed the auditors' duties as stated in the Pacific Acceptance case.
B) stated the auditors were aware of the intention of the third party's reliance on the audit report.
C) stated auditors must undertake the audit with reasonable skill and care.
D) all of the above

Question 58

Which one of the following was NOT set out as a test for establishing a duty of care in Al Saudi Banque?

A) reasonableness
B) intention to induce
C) foreseeability
D) proximity

Question 59

In the Scott Group case, the auditors were found to owe a duty of care to:

A) the contractual parties only.
B) a totally unknown third party.
C) the body of shareholders as a whole.
D) existing creditors.

Question 60

A privity letter should NOT be provided:

A) under any circumstances.
B) if the audit is being conducted under the Corporations Act.
C) if the third party seeking it fails to acknowledge in writing the potential inadequacy of the audit report for its purpose.
D) if reliance is foreseeable.

Question 61

A specific provision of the Corporations Act which could lead to a conflict of interest is the auditor having a loan from the audit client of more than $10,000.

Question 62

Common law generally allows auditors to withhold information from the courts by claiming such information is privileged.

Question 63

Does the auditing profession in Australia register public company auditors?

Question 64

Legal liability of auditors in Australia, particularly in relation to third parties, was expanded by the Esanda case in 1997.

Question 65

What is the role of the Financial Reporting Council (FRC)in monitoring the audit profession?

Question 66

If an auditor's suspicion of fraud is aroused, investigations should be extended.

Question 67

An example of auditor legal liability to third parties under common law would be the federal government prosecuting an auditor for knowingly issuing an incorrect audit report.

Question 68

A tort is a civil wrong, of which negligence is a good example.

Question 69

A contributory negligence defence succeeded in the AWA Ltd v Daniels case.

Question 70

Liability to third parties is a contentious issue in auditing.

Question 71

The auditor's duty to inform management extends to nonmaterial irregularities.

Question 72

The standard of due care to which the auditor is expected to be held is referred to as the reasonable person concept.

Question 73

In Al Saudi Banque, a duty of care was found not to be owed to prospective lenders.

Question 74

An auditor holds office for a period of twelve months, with reappointment required annually.

Question 75

When the auditors have followed Australian auditing standards yet still fail to discover immaterial fraud, courts will find them liable.

Question 76

There are a number of things that audit firms can do to reduce their exposure to lawsuits.Which one of the following is NOT such an item?

A) Perform quality audits.
B) Hire qualified auditors and train and supervise them.
C) Deal only with clients possessing integrity.
D) Sanction other firms for improper conduct and performance.

Question 77

Which one of the following is a NOT a method to reduce auditors' legal liability?

A) Exercise professional scepticism.
B) Perform quality audits.
C) Include a disclaimer paragraph in the audit report.
D) Employ qualified personnel.

Question 78

Proportionate liability is the risk an auditor takes that an entity will fail, and he or she is liable for all losses incurred by the entity.

Question 79

Legal liability and the cost of defending actions have been a significant problem for the auditing profession in Australia.

Question 80

The respective obligations of the client and auditor are outlined in:

A) a letter of recommendation.
B) an expert witness's testimony.
C) an engagement letter.
D) a confirmation letter.