Deck 17: Professional Liability

Question 1

The statutory law concept of liability is based on state and federal securities laws.

Answer 1

True

Question 2

The contract law concept of liability is based on breach of contract.

Answer 2

True

Question 3

Joint and several liability requires that damages should be paid by each guilty party,only to the extent each party is responsible.

Answer 3

False

Question 4

An identified user of a financial statement is one known to the auditor to be a user of the financial statement.

Question 5

The common law concept of liability is based on negligence and fraud.

Question 6

The statutory law concept of liability is primarily based on state securities laws,or "blue sky".

Question 7

Contingent-fee compensation for lawyers protects the privileged and discourages lawsuits.

Question 8

Plaintiffs who sue auditors almost always allege that the auditors committed fraud.

Question 9

In common law litigation against auditors,third parties must prove that they relied on financial statements.

Question 10

An auditor can be construed to act negligently if he or she fails to follow GAAS requirements and the actions result in harm to others or their property.

Question 11

Audit reports accompanying a financial statement serve as a guarantee that an investment in the audited company is free of risk.

Question 12

Common law is written law established by each state subject to specific federal guidelines .

Question 13

Ordinary negligence is often referred to as constructive fraud.

Question 14

The concept of auditor's liability is based entirely on common law.

Question 15

Class-action suits are designed to give plaintiffs with small losses the ability to join together to afford the costs of litigation.

Question 16

Breach of contract occurs when a person fails to perform a contractual duty that has not been excused.

Question 17

Gross negligence is often referred to as constructive fraud.

Question 18

The "deep pocket theory" is based on joint and several liability and,as a result,auditors are often responsible for the full amount of losses to plaintiffs.

Question 19

Gross negligence is the failure to exercise minimal care without evidence of intent to cause damage to others or deceive others.

Question 20

A breach of contract suit brought by a client may result in compensatory damages if specific performance is not appropriate.

Question 21

Failure to perform a contractual duty that has not been excused is considered malpractice.

Question 22

Fraud is an intentional concealment or misrepresentation of a material fact that causes damage to those deceived.

Question 23

Auditors have similar responsibilities to identified,foreseen and foreseeable users of financial statements.

Question 24

Engagement letters are the cornerstone of a defensive practice program by CPAs.

Question 25

The Restatement of Torts approach further supports the Ultramares conclusion that only clients may sue auditors for breach of contract.

Question 26

If public accounting firms practice defensive auditing,there is no need for professional liability insurance.

Question 27

The cornerstone of any defensive practice program is professional liability insurance.

Question 28

Privity is a concept defining the unwritten relationship between the auditor and third-party beneficiaries

Question 29

The Continental Vending case represented the first criminal action against auditors who were found guilty of a conspiracy,even though they did not personally gain from it.

Question 30

The Wisconsin Supreme Court extended auditor liability to foreseeable users in the case of Citizens State Bank v.Timms Schmidt & Co.

Question 31

The Private Securities Litigation Reform Act of 1995 intends to curb frivolous class action lawsuits brought under federal securities laws.

Question 32

A foreseeable user of a financial statement is unknown to the auditor,but the auditor can reasonably expect this type of person to use the financial statement.

Question 33

The doctrine of due care means that auditors are expected to be infallible.

Question 34

The Ultramares case established the initial precedent that auditors' liability for ordinary negligence is limited to those who are in privity of contract.

Question 35

Contingent-fee based cases are alleviating the intensity and volume of lawsuits against auditors.

Question 36

In a common law case against auditors,third parties must prove that the auditors knew or should have known the financial statements were misleading.

Question 37

The Securities Act of 1934 regulates the issuance of securities in the primary market.

Question 38

Breach of contract involves a tort on the part of the auditor.

Question 39

The AICPA requires its members in public practice to complete 120 hours of continuing education each year to retain membership.

Question 40

Increased auditor liability has resulted from class action lawsuits and the complexity of accounting principles.

Question 41

Under common law in states using the Restatement of Torts rule,third-party users must prove gross negligence or fraud unless they classify themselves as third-party beneficiaries of the financial statements.

Question 42

An unsettled issue of liability for CPA firms concerns audited financial information disseminated on the Internet.

Question 43

Under common law in states using the Ultramares rule,third-party users must prove gross negligence or fraud unless they are able to get themselves classified as third-party beneficiaries of the financial statements.

Question 44

All of the following factors have led to increased litigation against the auditor except

A)class-action suits.
B)increased complexity of accounting standards.
C)less demanding auditing standards for detection of errors and regularities.
D)joint and several liability statutes.

Question 45

Which of the following is known as the failure to exercise reasonable care,thereby causing harm to another or to property?

A)ordinary negligence.
B)gross negligence.
C)fraud.
D)scienter.

Question 46

Which of the following terms refers to an intentional concealment or misrepresentation of a material fact that causes damage to those deceived?

A)gross negligence.
B)fraud.
C)ordinary negligence.
D)breach of contract.

Question 47

The duty of care that third-party users of audited financial statements generally must prove differs between the various states based upon court cases.The foreseeable rule is the one most extensively utilized among the states.

Question 48

Thomas Leegins,CPA,purposely omitted the confirmation of accounts receivable because of his knowledge that management had grossly overstated this account.Accounts receivable are material to the balance sheet.Leegins is most likely guilty of which of the following?

A)fraud.
B)a civil tort.
C)ordinary negligence.
D)gross negligence.

Question 49

In 2009,the SEC issued rules requiring companies to provide financial information in a form that can be easily downloaded directly into interactive spreadsheets to make it easier for investors to analyze and to assist in automating regulatory filings.

Question 50

A reasonable cause for action against the auditor for breach of contract may include all of the following except which of the following?

A)violating client confidentiality.
B)withdrawing from an audit engagement without justification.
C)failure to provide the audit report on time.
D)failure to discover an immaterial error.

Question 51

A tort is a wrongful action against someone that results in harm to them.

Question 52

Jack Box,CPA,misinterpreted the results of several accounts receivable confirmations in the audit of Jones Company.Box would be guilty of which of the following?

A)fraud.
B)scienter.
C)ordinary negligence.
D)gross negligence.

Question 53

Third-party users of audited financial statements generally must prove that they suffered a loss,reliance on the financial statements,and that the auditors knew or should have known that the financial statements were misstated.

Question 54

Sally Schultz,CPA,neglected to observe the taking of physical inventory when she audited Gordy Company.Inventory is material to the balance sheet.Schultz is most likely guilty of which of the following?

A)fraud.
B)scienter.
C)ordinary negligence.
D)gross negligence.

Question 55

Defensive auditing means taking special actions to avoid lawsuits.

Question 56

The Securities Act of 1933 deals with the initial registration of the issuance of new securities with the SEC and it requires plaintiffs to prove fraud or gross negligence.

Question 57

The Securities Act of 1934 regulates the trading of securities after their initial issuance and it requires plaintiffs to prove fraud or gross negligence.

Question 58

The shareholders of a bank sue Joe Bush,CPA,for malpractice due to an audit failure that preceded the insolvency of the bank.The jury determines that Bush is 20 percent at fault and the bank management is 80 percent at fault.Bush is fully insured.Under joint and several liability,Bush will pay which of the following?

A)between 20 percent and 100 percent of the damages.
B)100 percent of the damages.
C)50 percent of the damages.
D)80 percent of the damages.

Question 59

Generally the courts have held auditors liable to third-party users when the auditor has been found guilty of fraud or gross negligence.

Question 60

Most large U.S.CPA firms are affiliates of international organizations.Such organizational structures have important implications for legal liability,although the legal liability outcomes are not always predictable.

Question 61

Who may sue an auditor under common law for a tort?

A)clients
B)foreseeable parties
C)foreseen parties
D)anyone with grounds

Question 62

The Securities Act of 1934 has the primary objective of regulating which of the following?

A)Trading of securities after their initial issuance.
B)Initial issuances of securities.
C)Adherence to the Sarbanes-Oxley Act of 2002.
D)The registration of audit firms with the PCAOB.

Question 63

Which of the following is considered a failure to perform a contractual duty that has not been excused?

A)breach of contract.
B)malpractice.
C)fraud.
D)third-party defense.

Question 64

If an auditor does not complete an audit according to the terms of the engagement letter,there is a risk that the auditor will be sued for

A)the Restatement approach.
B)breach of contract.
C)joint and several liability.
D)privity of contract.

Question 65

The auditor of Moab Ridge,Inc.and subsidiaries,a public company,performs a valuation analysis for the purpose of testing the goodwill for impairment.Moab Ridge did not have a valuation analysis performed previously and will use the auditors' valuation for internal purposes as well.The above situation best represents which of the following?

A)A violation of common law.
B)A prohibited service.
C)Scienter on behalf of the auditor.
D)Value added auditing for client retention.

Question 66

The Jaillet v.Cashman gives indication to which of the following?

A)Mass dissemination of erroneous financial information may give way to corporate lawsuits.
B)Scienter leads to fraudulent reporting by the auditors in a Securities Act of 1934 filing.
C)Rule 11 of the Securities Exchange Act of 1934 gives the plaintiff the right to sue underwriters.
D)Criminal actions of auditors will be measured by RICO standards.

Question 67

Which aspect of statutory law places the burden of proof onto the auditor?

A)Scienter.
B)Securities Act of 1933.
C)Joint and Several Liability.
D)Ultramares.

Question 68

Defensive auditing includes all of the following except

A)clarifying the nature of the arrangement through the use of a written engagement letter.
B)knowing when your client is about to fire your firm before hand.
C)carefully selecting which clients to accept and retain.
D)evaluation of a firm's capacity to adequately perform services for a specific client.

Question 69

Which of the following is an example of Joint and Several Liability?

A)Chirs Schrewers,CPA will not be liable because of due diligence.
B)David,CPA will be required to pay 100%,even though he is only 40% responsible.
C)Kate Brownman,CPA does not have privity of contract with the client's bank.
D)Meadow Elkins states that the client contributed to the loss of the users.

Question 70

An intent to deceive is best known in the regulatory arena as which of the following?

A)contributory negligence.
B)ordinary negligence.
C)gross negligence.
D)scienter.

Question 71

The Securities Act of 1933 regulates which of the following?

A)The initial registration of all corporations with the federal government.
B)The initial registration of all corporations with state governments.
C)Corporations to file registration statements when reselling prior issues to the public.
D)Corporations to file registration statements when issuing new securities to the public.

Question 72

Which of the following is one method utilized by the auditing profession to assist in maintaining independence?

A)quality continuing education in relevant areas.
B)screening of auditors by the Federal Trade Commission.
C)partner rotation on public engagements every five years.
D)prohibition of audit services on any public client.

Question 73

The primary objective of the Securities Act of 1933 is the regulation of which of the following?

A)Trading of securities after their initial issuance.
B)Initial issuances of securities.
C)Adherence to the Sarbanes-Oxley Act of 2002.
D)The registration of audit firms with the PCAOB.

Question 74

An example of a case that subjected an auditor to criminal charges is

A)the McKesson & Robbins case.
B)the Citizens Timm case.
C)the Bily v.Arthur Young & Co.case.
D)the Equity Funding case.

Question 75

Which of the following most likely constitutes breach of contract of the auditor with a client?

A)Withholding client information from interested external parties.
B)Withdrawing from the engagement due to accepting a new client.
C)Failing to discover immaterial fraud in the client's payroll department.
D)Providing the audit opinion to the client prior to the due date.

Question 76

When the client and the auditor are both sued and judgment is rendered against both,the auditor will be required to settle the entire judgment if the client is bankrupt.Which of the following is a representation of the above?

A)Private Litigation Reform.
B)Joint and several liability statutes.
C)Comparative fraud.
D)The Securities Acts.

Question 77

The law that requires companies to file registration statements with the SEC before they may issue new securities to the public is known as the

A)RICO law.
B)Securities Exchange Act of 1934.
C)Securities Act of 1933.
D)Securities Act of 1934.

Question 78

The audit firm must prepare to minimize exposure against litigation and regulatory investigation.Which of the following represents the best method of performing this task?

A)Engaging competent and trustworthy criminal defense attorneys.
B)Lobbying the SEC to become allies with CPAs and related constituents.
C)Instituting a sound system of quality control within the firm.
D)Restructuring to a traditional partnership to share the risk with other professionals.

Question 79

The court case that established the precedent that an auditor can be held liable to third parties for fraud and gross negligence,but limited auditor liability for ordinary negligence to those who are in privity of contract,is the

A)McKesson and Robbins case.
B)1136 Tenants Corporation case.
C)CIT Financial Corporation case.
D)Ultramares Corporation case.

Question 80

The Securities Exchange Act of 1934 places the burden of proof on which of the following parties?

A)third-party plaintiff.
B)attorney defendant.
C)auditor defendant.
D)client plaintiff.