Question 1

Which of the following is NOT a requirement of Section 10A of the Securities Exchange Act of 1934 for auditors of public companies with respect to illegal acts?

Accepted Answer

Section 10A of the Securities Exchange Act of 1934 requires auditors of public companies to determine whether it is likely that an illegal act has occurred, determine what the possible effect of the illegal act is on the financial statements, and inform management and assure that the audit committee knows about any material illegal act that has been detected. It does not require auditors to determine whether management participated in the illegal act.

Question 2

How long do management and the audit committee have to act if the independent auditor reports possible illegal acts to them?

Accepted Answer

The answer of How long do management and the audit...

Question 3

The Securities and Exchange Act of 1934:

Accepted Answer

The Securities and Exchange Act of 1934 requires the filing of audited annual statements and reviewed quarterly statements, among other regulations related to the securities industry. It does not limit the financial liability of independent auditors, regulate the initial offering financial statements of securities, or regulate which services may be performed for a publicly-traded company by an audit firm.

Question 4

Which of the following elements do NOT have to be proved once a plaintiff has established the ability to sue under rule 10b-5?

Accepted Answer

Once a plaintiff has established the ability to sue under rule 10b-5, material, factual misrepresentation or omission, reliance by the plaintiff on the financial statements, and damages suffered by plaintiff as a result of reliance on the financial statements must be proved. However, error by auditor leading to plaintiff's loss is not a necessary element to prove under rule 10b-5.

Question 5

Under the rules of the Sarbanes-Oxley Act of 2002 (SOX), who must certify the public reports filed with the SEC?

Accepted Answer

The CEO and CFO are both required to certify the accuracy of the financial statements filed with the SEC under SOX. This is known as the CEO/CFO certification requirement. The independent auditor is responsible for conducting an audit of the financial statements and providing an opinion on their accuracy, but they do not certify the reports themselves. The board of directors may have oversight responsibilities, but they are not directly involved in the certification process.

Question 6

What is a worrisome consequence under the joint and several liability principle?

Accepted Answer

Under the joint and several liability principle, each negligent party could be held liable for the total of damages suffered. This means that if one of the parties responsible for the damages is unable to pay, the other parties may be held accountable for their share and the share of the party who cannot pay. This could result in one party bearing the majority of the burden even if they were only partially responsible for the damages.

Question 7

In the case of Phar-Mor v. Coopers & Lybrand the auditors were found guilty of fraud because

Accepted Answer

The auditors were found guilty of fraud because they were grossly negligent and had a blatant disregard for the truth. They had failed to perform the proper auditing procedures and overlooked the fraudulent activities of Phar-Mor's management. Additionally, the auditors were found to have altered work papers and provided false and misleading information to regulators.

Question 8

The accounting issue(s) in the Crazy Eddie case were:

Accepted Answer

The main accounting issue in the Crazy Eddie case was inflating inventory and net income. This was done by overvaluing inventory on the balance sheet and recording fraudulent sales transactions to increase revenue and net income.

Question 9

Under the Private Securities Litigation Reform Act (PSLRA), if an auditor concludes that an illegal act with a material effect on the financial statements has been reported to, but not dealt with by senior management, the auditor should next report his/her conclusions to:

Accepted Answer

The PSLRA requires auditors to report any illegal act with a material effect on the financial statements to senior management. If senior management fails to take appropriate action, the auditor should report his/her conclusions to the company's board of directors, who have the ultimate responsibility for oversight of the company's financial reporting. The SEC may also be notified, but only after the board of directors has been informed. The office of the controller/comptroller for the appropriate state or the Federal Bureau of Investigation may also be contacted depending on the nature of the illegal act, but the board of directors should be the first course of action in all cases.

Question 10

Under the Securities Act of 1933, accountants who assist in the preparation of the registration statement are civilly liable if the registration statement:

Accepted Answer

Accountants who assist in the preparation of the registration statement are civilly liable if the registration statement contains untrue statements of material fact, omits material facts required by statute or regulation, or omits information that if not given makes the facts stated misleading. Therefore, all of the above options are correct.

Question 11

The U.S. Supreme Court ruled in State Street v. Ernst that:

Accepted Answer

The U.S. Supreme Court in State Street v. Ernst ruled that the court may "construct" fraud based on gross negligence of the auditor, meaning that auditors can be held liable for fraud if their actions demonstrate gross negligence.

Question 12

A "particularized" allegation requires establishing:

Accepted Answer

A "particularized" allegation requires establishing strong circumstantial evidence of conscious misbehavior or recklessness and facts showing the defendant had both motive and opportunity to commit securities fraud, encompassing all the options provided.

Question 13

Under the Securities Act of 1933 and the Securities and Exchange Act of 1934, accountants may be subject to criminal penalties for:

Accepted Answer

Accountants may face criminal penalties for willful violations of the securities acts, as these acts specifically address intentional misconduct related to securities regulations.

Question 14

Rule 10b-5 of the Securities Exchange Act of 1934 makes it unlawful for a CPA to engage in each of the following activities except:

Accepted Answer

Rule 10b-5 primarily addresses fraud and deceit in the context of securities trading and does not specifically govern the fair presentation of financial statements.

Question 15

In the case of Reisman v. KPMG Peat Marwick LLP, the auditors were found guilty of fraud because

Accepted Answer

The auditors were found guilty of fraud because they were aware of misrepresentations made by the company's management and those misrepresentations were relied upon by others.

Question 16

Which of the following is NOT a valid defense to legal liability under the Securities Act of 1933?

Accepted Answer

Non-negligence defense is not a valid defense under the Securities Act of 1933. The other three options, materiality defense, due diligence defense, and lack of causation defense are valid defenses under the act.

Question 17

The "particularity" provision in the PSLRA allows a plaintiff to:

Accepted Answer

The "particularity" provision in the PSLRA requires a plaintiff to assert facts with specificity in order to support allegations of scienter (intent to deceive, manipulate, or defraud). It does not allow the plaintiff to sue the auditor or management, or assert privity.

Question 18

In establishing that the third party relied on the financial statements, one factor that works against plaintiffs' establishing such reliance is:

Accepted Answer

C) Damages or loss suffered by the plaintiff would have occurred regardless of whether the audited financial statements were misstated. This suggests that the reliance on financial statements was not a factor in the loss, undermining the claim of reliance.

Question 19

Under the Securities Act of 1933, if damages were incurred and there was a material misstatement or omission in the financial statements, the CPA will most likely lose the lawsuit unless:

Accepted Answer

The CPA can defend against the lawsuit by proving due diligence, meaning they conducted a reasonable investigation and had reasonable grounds to believe the financial statements were accurate.

Question 20

The Private Securities Litigation Reform Act of 1995 applies the practice of ________ to auditor liability determinations.

Accepted Answer

The Private Securities Litigation Reform Act of 1995 applies proportionate liability to auditor liability determinations. This means that auditors are only responsible for losses that are directly attributed to their own negligence and not for the losses caused by other parties. This was introduced to reduce the exposure to auditors from large liability claims.

Quiz 6: Legal, Regulatory, and Professional Obligations of Auditors