Deck 4: Legal Environment Affecting Audits Pt Iii Executing an Integrated Audit

Question 1

The Securities Act of 1933 requires that the plaintiff show that the financial statements were relied upon.

Answer 1

False

Question 2

The concept of standing determines whether or not the plaintiff may bring a lawsuit.

Answer 2

True

Question 3

Judges can award punitive damages for cases of negligence.

Answer 3

False

Question 4

In the Barchris case, the Court held that the auditor is not liable for subsequent events occurring after the audit report date but before the registration date.

Question 5

Negligence is considered a cause of action.

Question 6

The term "privity" is an example of the relationship between auditor and plaintiff.

Question 7

The answer from the defendant might include an argument that the plaintiff does not have standing.

Question 8

The complaint in a civil suit filed by a plaintiff has to prove standing.

Question 9

The defendant in a lawsuit involving negligence brought by the audit client is the client.

Question 10

The SEC can bring civil as well as criminal actions against auditors.

Question 11

Audit failure only occurs if the client goes bankrupt.

Question 12

Joint and severally applies to damages for negligence.

Question 13

Fraud charges do not require the plaintiff to show (s)he has a direct relationship to the auditor.

Question 14

Audit risk only applies to auditors who audit public companies.

Question 15

If the plaintiff did not rely on the financial statements, the auditor can use this as a valid defense.

Question 16

Audit risk is experienced by all auditors.

Question 17

One reason for negligence is that the auditor failed to follow GAAS.

Question 18

Registration statements apply to new security issues.

Question 19

The auditor can control all components of audit risk.

Question 20

Section 10b-5 of the Securities Act of 1934 targets fraud.

Question 21

Discovery:

A) Involves depositions.
B) Involves reviewing documents.
C) Involves third parties, such as experts.
D) All of the above.

Question 22

Privity is:

A) Connection or relationship between two parties each having a common interest in the same subject matter.
B) Connection or relationship between two parties each having a material interest in the same subject matter.
C) Connection or relationship between two parties each having any interest in the same subject matter.
D) None of the above.

Question 23

Foreseeable third parties are those who:

A) Are potential users of the financial statements.
B) Are potential plaintiffs in legal actions against auditors.
C) Increase the potential liability for auditors.
D) All of the above.

Question 24

The plaintiff's legal standing is influenced by:

A) The connection between the potential plaintiff and the auditor.
B)
B) The nature of the wrongdoing alleged against the auditor.
C) Both a and
D) None of the above.

Question 25

The complaint, as filed by the plaintiff, includes:

A) Remedies being sought.
B) Proposed course of action.
C) Dollar amount of damages sought from the auditor.
D) All of the above.

Question 26

Arbitration may occur:

A) Before a trial.
B)
B) During a trial.
C) After a trial.
D) Both a and

Question 27

The "answer" in a legal proceeding:

A) Refers to the auditor's response.
B) Can cite lack of standing on the part of the plaintiff.
C) Contains answers that agree with the complaint.
D) All of the above.

Question 28

Standing is defined as:

A) The right to bring a lawsuit.
B) The right to bring a legal cause of action.
C) The court's permission for a plaintiff to bring a lawsuit.
D) The court's permission for a plaintiff to bring a legal cause of action.

Question 29

Audit risk involves the risk that:

A) The financial statements contain a misstatement.
B) The ICFR fails to report material internal control weaknesses and the audit report also fails to mention this fact.
C) The client lied to management.
D) All of the above.

Question 30

Tort law addresses:

A) Situations in which negligence occurs
B) Situations in which a party suffers a loss and wants to collect damages.
C) Situations in which a party suffers a loss and wants to collect punitive damages.
D) None of the above.

Question 31

Ultramares established that:

A) Auditors could be held liable for negligence.
B) Plaintiffs had to show gross negligence to prevail.
C) Plaintiffs have to show privity in order to sue for negligence.
D) None of the above.

Question 32

The appellate court can:

A) Reverse the lower court's decision.
B) Remand the case back to the lower court for further fact finding.
C) Uphold the lower court's decision.
D) All of the above.

Question 33

Generally, the closer the relationship between auditor and plaintiff, the:

A) Easier it is to prove negligence.
B) The harder it is to prove negligence.
C) The more likely a plaintiff is to prevail.
D) None of the above.

Question 34

Generally, the auditor:

A) Cannot control audit risk.
B) Can control audit risk.
C) Controls audit risk to the extent of audit testing.
D) None of the above.

Question 35

If a jury "finds for the defendant," then:

A) The auditor must pay the damages awarded.
B) The plaintiff must pay the damages.
C) The auditor may appeal.
D) The plaintiff may appeal.

Question 36

Arthur Andersen & Co. was found guilty by the:

A) District court.
B) Supreme Court.
C)
C) Court of public opinion
D) Both a and

Question 37

The foreseen third-party rule states:

A) Auditors can be held liable for damages to plaintiffs even if they are not known to the auditor.
B)
B) The auditor is liable to third parties not normally having privity.
C) The plaintiff does not have to show standing.
D) Both a and

Question 38

Near privity differs from privity in that:

A) The plaintiff has standing in cases where the wrongdoing is less severe than fraud.
B) The auditor must know the plaintiff.
C) The plaintiff must show that (s)he relied on the financial statements.
D) All of the above.

Question 39

When might an auditor choose arbitration over a trial:

A) When the cost of a trial is prohibitive.
B)
B) To avoid possible damage to its reputation.
C) Both a and
D) None of the above.

Question 40

A summary judgment:

A) Is brought by the plaintiff's attorney.
B) Is brought by the defendant's attorney.
C)
C) Seeks to dismiss the case before evidence is presented at trial.
D) Both b and

Question 41

A registration statement is a:

A) Document filed by the auditor with the SEC for new securities being offered.
B) Document filed by a client with the SEC for new securities being offered.
C) Can be filed by either the client or auditor.
D) None of the above.

Question 42

Contributory negligence concerns:

A) The management of the corporation under audit.
B) Cases where management hides liabilities intentionally from the auditors.
C) Cases where management is responsible for the negligent act.
D) All of the above.

Question 43

Joint and severally liable means that:

A) Each defendant is liable for the whole judgment if the other party cannot pay.
B) Each defendant is liable for only his portion of the judgment.
C) Each defendant is liable for the compensatory, but not punitive judgment.
D) None of the above.

Question 44

The Barchris case set precedent in that:

A) The auditor was found guilty of fraud.
B) The auditor is responsible for reporting material differences that arise between the audit report date and the registration statement date.
C) The auditor is responsible for all differences that arise between the audit report date and the registration statement date.
D) All of the above.

Question 45

Referring to #42 above, Mary Ellen will not prevail if:

A) The "reasonable man" standard was met, but barely.
B) Her firm followed GAAS.
C) The ICRF was not reasonably tested for accuracy.
D) All of the above.

Question 46

In a breach of contract claim, the auditor can:

A) Cite the professional standards.
B) Cite lack of privity on the part of the plaintiff.
C) Cite client refusal to provide records to the auditor on a timely basis.
D) All of the above.

Question 47

Fraud:

A) Involves deception on the part of the auditor in conducting an audit of the financial statements.
B) Is similar to gross negligence.
C) Is defined in the Securities Acts of 1933 and 1934.
D) All of the above.

Question 48

A defense against a charge of fraud is that:

A) The auditor did not knowingly or intentionally perform the act.
B) The auditor performed the audit in accordance with GAAS.
C) The auditor relied on the work of third parties and is not subject to fraud charges.
D) All of the above.

Question 49

Mary Ellen Dillon is an audit partner with a large public accounting firm. Recently, one of her long-standing clients suddenly filed for bankruptcy protection. Mary Ellen's firm had previously issued an unqualified opinion on the client's financial statements. As a result, Mary Ellen's firm is being sued for negligence. Mary Ellen's best defense would be:

A) To challenge standing on the part of the defendant.
B) To cite the professional standards and maintain that the firm met the "prudent person" standard.
C) To cite the client's responsibility for the financial statements.
D) All of the above.

Question 50

In order for punitive damages to be awarded, the auditors must be guilty of:

A) Negligence.
B) Gross negligence.
C)
C) Fraud.
D) Either b or

Question 51

The main difference between fraud and negligence is:

A) The amount of the loss.
B) The degree of audit failure.
C) The state of whether the auditor knew what (s)he was doing was wrong.
D) All of the above.

Question 52

Referring to the facts in #42 above, Mary Ellen will likely prevail if her firm can show:

A) GAAS was followed.
B) GAAP was interpreted correctly.
C) The audit testing reflected the risks known at the time.
D) All of the above.

Question 53

Damages can be:

A) Compensatory, but limited to the loss incurred.
B)
B) Compensatory, and include both the loss incurred and an amount for punitive damages.
C) Compensatory, but limited to the amount set by each state.
D) Both a and

Question 54

Negligence is defined as:

A) Conduct which falls below the standards established by law.
B)
B) Conduct which violates the audit standards.
C) Conduct which fails to detect a misstatement in the financial statements.
D) Both a and

Question 55

The Securities Act of 1933 significantly differs from other statutes concerning auditor liability in that:

A) The plaintiff does not need to show negligence.
B) The plaintiff does not need to show (s)he relied on the financial statements.
C) Any third party that purchased securities described in the registration statement may sue the auditor for any material misrepresentation.
D) All of the above.

Question 56

Section 10b-5 of the Securities Act of 1934 requires that:

A) Plaintiffs must show the auditors lacked reasonable care when performing an audit.
B) Plaintiffs must show standing before bringing a lawsuit.
C) Plaintiffs must prove scienter.
D) All of the above.

Question 57

"Fraud on the Market" theory holds that:

A) The auditor need not be liable for damages if the market ignored the audit report.
B)
B) The auditor is liable for damages to those who relied on financial statements it audited that contained a material misstatement.
C) The plaintiffs do not have to show they relied on the financial statements, but merely that the market used the information contained in the financial statements to affect the stock price.
D) Both a and

Question 58

Scienter means:

A) The auditor exercised poor professional judgment.
B) The auditor knowingly sought to deceive the plaintiff.
C) The auditor failed to exercise due professional care.
D) All of the above.

Question 59

Under the joint and severally liable theory, if there are three defendants and defendant 1 goes bankrupt, then defendants 2 and 3 are:

A) Each liable for one-third of the amount.
B) Each liable for one-half the amount.
C) Both liable for the full amount, although each only has to pay half assuming both can pay.
D) None of the above.

Question 60

Punitive damages are:

A) Added to compensatory damages in setting total damages.
B) Only assessed in cases where the auditor is guilty of fraud.
C) Assessed at the discretion of the jury.
D) All of the above.

Question 61

The Hochfelder case involved:

A) Management collusion.
B) Management fraud.
C) Scienter.
D) All of the above.

Question 62

In order to be held guilty under RICO, the plaintiff must prove that:

A) The auditor was negligent in detecting fraud.
B) The auditor was negligent in detecting material misstatements.
C) The auditor participated in the operations and management of the fraudulent act.
D) All of the above.

Question 63

RICO is typically used for violations of:

A) Securities fraud.
B) Casino fraud.
C) Mail fraud.
D) All of the above.

Question 64

The Foreign Corrupt Practices Act of 1977:

A) Requires certain records be kept for a minimum amount of time.
B) Forbids the bribing of foreign officials.
C) Requires companies maintain a reasonable set of internal controls.
D) All of the above.

Question 65

If Fraud on the Market Theory prevails, then which of the following is likely to occur:

A) More findings of negligence on the part of juries.
B) Greater punitive damages awarded by juries.
C)
MATCHING
C) Increased audit fees to cover increased costs of litigation.
D) Both a and

Question 66

The Sarbanes-Oxley Act of 2002 (SOX):

A) Sets auditor penalties in sections 104 and 105.
B)
B) Requires the PCAOB to inspect public accounting firms that audit public companies.
C) Requires an annual audit for all publically traded companies.
D) Both a and

Question 67

Obstruction of justice involves:

A) Shredding audit evidence.
B) A criminal offense.
C) Destroying emails pertinent to the audit.
D) All of the above.

Question 68

The SEC rules of practice:

A) Involve criminal complaints against auditors.
B) Can result in sanctions and penalties against auditors.
C) Can be appealed to Congress.
D) All of the above.