Deck 47: Professional Liability and Accountability

Question 1

A professional can not be liable for fraud if he or she did not act with fraudulent intent.

Answer 1

False

Question 2

For a plaintiff to recover damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, proof of intent is necessary.

Answer 2

True

Question 3

An accountant is not required to discover every impropriety, defalcation, and fraud in a client's books.

Answer 3

True

Question 4

An accountant's liability under the Securities Act of 1933 re?quires privity of contract with the purchaser of a security.

Question 5

Attorneys are required to find relevant law that is applicable to a case and can be discovered through a reasonable amount of research.

Question 6

An accountant is always liable for a misleading statement that affects the price of a security, even if the accountant acted in good faith.

Question 7

Traditionally, a professional owed a duty only to those with whom the professional had a direct contractual relationship.

Question 8

A client's negligence is never a defense to a charge of negligence against an accountant.

Question 9

A failure to follow generally accepted accounting principles and gener?ally accepted auditing standards is proof of a lack of due diligence.

Question 10

Professionals are required to deliver services but the competency of the services is never an issue.

Question 11

Under rules of professional misconduct, an attorney should not engage in conduct involving deceit.

Question 12

An accountant can avoid liability by proving that his or her negligence was only the proximate cause of the cli?ent's loss.

Question 13

Professionals are governed by the contracts they enter into with their clients.

Question 14

Negligence cases against professionals usually focus on the element of causation.

Question 15

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

Question 16

Malpractice is professional negligence.

Question 17

In an opinion, an auditor can include a general statement disclaiming any liability for false or misleading financial statements.

Question 18

Working papers are the documents through which a court orders an accountant to audit a public company.

Question 19

Under the Sarbanes-Oxley Act of 2002, accountants need not retain working papers relating to an audit or review.

Question 20

An accountant is not liable for an omission in a registration statement to a purchaser of securities if the omission had no causal connection to the purchaser's loss.

Question 21

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is

A) embezzlement.
B) general misconduct.
C) professional negligence.
D) misrepresentation of professional expertise.

Question 22

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards

A) does not indicate that Norman was negligent.
B) is prima facie evidence that Norman was negligent.
C) precludes Norman from raising any defense against a negligence claim.
D) is embarrassing but will never subject Norman to liability.

Question 23

Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy 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 24

Hadley, an accountant, accumulates working papers while performing an audit for Ilene. After the audit, these documents belong to

A) Hadley, with Ilene having a right of access to the papers.
B) Ilene, with Hadley having a right of access to the papers.
C) neither Hadley nor Ilene-the papers must be disposed of.
D) the Public Company Accounting Oversight Board.

Question 25

Delaney is an accountant charged with negli?gence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that

A) scienter was lacking.
B) he complied with all International Financial Reporting Standards.
C) the negligence was not the proximate cause of the client's losses.
D) the negligence was only contributory.

Question 26

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 27

Commerce Bank files a suit against Drake, its former accountant, al?leging 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 28

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with

A) Esteban and Figaro.
B) Esteban only.
C) Figaro only.
D) none of the choices.

Question 29

Gift Basket Company's liabilities exceed its assets. Gift Basket hires Hill & Dale, an accounting firm, to prepare a balance sheet. Through Hill & Dale's negligent omissions, the sheet shows a net worth. Investment Bank relies on the balance sheet to make a loan to Gift Basket. When Gift Basket defaults, the bank files a suit against Hill & Dale. Under the Restatement rule, Hill & Dale is most likely

A) liable because Hill & Dale owed a duty of care to Gift Basket.
B) liable because Hill & Dale owed a duty to any foreseeable user.
C) liable if Hill & Dale knew that the bank would rely on the balance sheet.
D) not liable because Hill & Dale and the bank were not in privity.

Question 30

Craig is an accountant whose clients include Deep Excavation Corporation. Elbert is Craig's attorney. Under the common law and by statute in many states, working papers that Craig develops when preparing financial reports for Deep Excavation are owned by

A) Craig.
B) Deep Excavation.
C) Elbert.
D) no one-the papers must be destroyed immediately after use.

Question 31

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

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 32

Rochelle, an accountant, enters into a contract to provide services to Sky Transport Inc. Rochelle does not finish the work within the contract's deadline. Sky Transport pays a penalty for the missed deadline and hires Turbo to complete the job. Rochelle is most likely liable for

A) nothing.
B) Sky Transport's penalty and the cost to hire Turbo.
C) Sky Transport's penalty only.
D) the cost to hire Turbo only.

Question 33

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital 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 foresee?able users of the work.

Question 34

Reed prepares federal corporate income tax returns for Shopping Malls, 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 35

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

A) intended to defraud Social Media Marketing, not Theo.
B) intended to profit on stock trades generally, not only Theo's.
C) is an otherwise competent accountant.
D) was not aware her statement was false.

Question 36

Beck is an accountant who prepares her clients' tax returns. Cole is not an accountant, but he also prepares tax returns for clients. Under the In?ternal Revenue Code, liability for preparing a false return may be im?posed on

A) Beck and Cole.
B) Beck only.
C) Cole only.
D) none of the choices.

Question 37

April is an accountant whose clients include Bistro Restaurants Inc. If April is negligent in her work for Bistro, most courts would hold her liable to Bistro 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 foresee?able users of the work.

Question 38

Ricardo, an accountant, contracts to conduct an audit for Sensei Sushi Restaurants. In performing the audit, Ricardo fails to detect certain misconduct. Ricardo is most likely

A) liable if a normal audit would have revealed the misconduct.
B) liable if Ricardo issues a specifically qualified opinion.
C) not liable if Ricardo generally disclaims any liability.
D) not liable if the misconduct was due to Sensei Sushi's negligence.

Question 39

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act of 2002, at the same time, for the same company, Root & Branch can also provide

A) bookkeeping and other services related to accounting records and financial statements.
B) none of the choices.
C) appraisal and valuation services.
D) financial systems design and implementation.

Question 40

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

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

Question 41

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

Question 42

Finola, a certified public accountant, provides accounting serv?ices to Global Trade Corporation. The services include preparing Global Trade's financial re?ports 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 let?ters indicate this situation. Relying on Finola's portrayal of Global Trade's finan?cial situation, the firm borrows a large sum of money to build a new ship?ping 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 en?gage in intentional fraud but was negligent, what is her potential liability?