Question 1

Under the Securities Exchange Act of 1934,fraud or reckless conduct must be shown in order to impose liability on the accountant under either Section 10(b)or Section 18(a).

Accepted Answer

This statement is true. Section 10(b) and Section 18(a) of the Securities Exchange Act of 1934 both require a showing of fraudulent or reckless conduct in order to hold an accountant liable.

Question 2

The contractual arrangement of an accountant with the client is often referred to as a(n):

Accepted Answer

An engagement refers to the contractual agreement between the accountant and the client which outlines the scope, responsibilities, and expectations of the services to be provided by the accountant.

Question 3

Accountants may be named as defendants in lawsuits that claim violations of the RICO Act.

Accepted Answer

Yes, accountants can be named as defendants in lawsuits that claim violations of the RICO Act, which is primarily intended to address organized crime but can also apply to other illegal activities.

Question 4

In a few jurisdictions,an accountant may not be called as a witness against a client in a court action.

Accepted Answer

In some jurisdictions, there are laws that prevent an accountant from being called as a witness against a client in a court action, such as the accountant-client privilege. However, this varies depending on the specific laws and regulations of each jurisdiction.

Question 5

A plaintiff in an action under Section 11 of the Securities Act of 1933 must prove that she relied on the misstatement of an accountant in order to recover.

Accepted Answer

Under Section 11 of the Securities Act of 1933, a plaintiff must prove that she relied on the misstatement of an accountant in order to recover.

Question 6

The 1976 Tax Reform Act imposes civil liability on accountants and others who prepare federal tax returns.

Accepted Answer

The 1976 Tax Reform Act does not specifically impose civil liability on accountants for preparing federal tax returns; it primarily addresses tax code changes and enforcement.

Question 7

Ordinary negligence of an accountant will result in liability under Rule 10b-5 of the Securities Exchange Act of 1934.

Accepted Answer

Ordinary negligence of an accountant does not result in liability under Rule 10b-5 of the Securities Exchange Act of 1934. To be held liable under this rule, the accountant must have acted with scienter (i.e., intent to deceive, manipulate, or defraud).

Question 8

Which of the following is not one of the requirements for an accountant to become a certified public accountant?

Accepted Answer

There are no size of firm requirements for an accountant to become a certified public accountant. The requirements include educational requirements (such as a minimum of a bachelor's degree and specific accounting courses), passage of the CPA exam, and a minimum period of audit experience.

Question 9

An accountant's failure to follow generally accepted auditing standards in conducting an audit generally amounts to:

Accepted Answer

When an accountant fails to follow generally accepted auditing standards in conducting an audit, it amounts to negligence, which is a breach of duty to exercise reasonable care in performing the audit. Fraud involves intentional misrepresentation or deceit, which may or may not be present in this scenario. Promissory estoppel, reliance, and falsification are not relevant in this context.

Question 10

If an auditor is unable to gather enough information to express an opinion about the financial statements,the auditor would issue a(n):

Accepted Answer

If the auditor is unable to gather enough information, they would issue a disclaimer of opinion, as they cannot express an opinion on the financial statements. Option A is incorrect because an unqualified opinion means that the auditor has gathered enough information and found the financial statements to be fairly presented. Option B is incorrect because a qualified opinion means that the financial statements are fairly presented except for a specific area, and option C is incorrect because an adverse opinion means that the financial statements are not fairly presented.

Question 11

If an auditor determines that the financial statements fairly present the financial results and position of the client,the auditor would issue a(n):

Accepted Answer

An unqualified opinion is issued when the auditor determines that the financial statements are fairly presented in accordance with the generally accepted accounting principles (GAAP) and there are no material misstatements or departures from GAAP. This is the best choice because it indicates that the auditor has no reservations about the fairness of the statements.

Question 12

If an auditor determines that the financial statements do not fairly present the financial results and position of the client,the auditor would issue a(n):

Accepted Answer

An adverse opinion is issued when the auditor determines that the financial statements do not fairly present the financial results and position of the client. This is the most severe type of audit opinion and indicates that the financial statements are materially misstated. An unqualified opinion, on the other hand, is issued when the financial statements are presented fairly in all material respects, while a qualified opinion is issued when the financial statements are presented fairly with the exception of a particular matter. A disclaimer of opinion is issued when the auditor is unable to obtain sufficient evidence to form an opinion on the financial statements.

Question 13

Knowledge of the rule presented in Section 32(a)of the Securities and Exchange Act of 1934 has no impact on whether or not an individual becomes imprisoned.

Accepted Answer

Section 32(a) of the Securities and Exchange Act of 1934 outlines penalties, including imprisonment, for willful violations of the Act, impacting whether an individual may be imprisoned.

Question 14

The guidelines that accountants must follow in preparing financial statements are the:

Accepted Answer

Generally accepted accounting principles (GAAP) are the guidelines that accountants must follow in preparing financial statements. GAAP includes the rules, standards, and procedures that public companies in the United States must follow when compiling their financial statements. It ensures consistency, accuracy, and comparability across financial reports and helps investors make informed decisions about investing in companies. While the SEC does provide guidance, it is not the primary source of accounting principles, and generally accepted auditing standards are related to the auditing process rather than financial statement preparation. There are also no specific government financial statement guidelines that apply universally to all organizations.

Question 15

The due diligence defense is a broad defense available to an accountant for a claim under rule 10b-5 of the Securities Exchange Act of 1934.

Accepted Answer

The due diligence defense is not applicable to claims under rule 10b-5; it is typically associated with Section 11 of the Securities Act of 1933. Rule 10b-5 focuses on fraud and does not provide a due diligence defense.

Question 16

If an auditor determines that the financial statements fairly present the financial results and position of the client except for one fairly minor,but material,item that is not properly presented,the auditor would issue a(n):

Accepted Answer

A qualified opinion is issued when the financial statements are fairly presented except for a specific material item or items that are identified in the auditor's report. This indicates that the financial statements are only partially in accordance with Generally Accepted Accounting Principles (GAAP).

Question 17

The guidelines that accountants must follow in conducting an audit are the:

Accepted Answer

Generally accepted auditing standards (GAAS) are the guidelines that accountants must follow in conducting an audit. GAAS are established by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) and provide a framework for conducting high-quality audits. Generally accepted accounting principles (GAAP) are guidelines for financial reporting, not for conducting an audit. The Securities and Exchange Commission and Department of Treasury have their own guidelines and regulations, but they do not provide specific guidance for conducting an audit.

Question 18

Which of the following is not typically a common law basis of liability to the client of an accountant?

Accepted Answer

Strict liability is not typically a common law basis of liability for accountants. Common law bases of liability for accountants include fraud, breach of contract, and negligence. Strict liability imposes liability regardless of fault or the existence of a contractual relationship.

Question 19

Section 18(a)of the Securities Exchange Act of 1934 imposes liability on accountants making a false or misleading statement in any document filed with the Securities and Exchange Commission.

Accepted Answer

Section 18(a) of the Securities Exchange Act of 1934 does indeed impose liability on accountants for false or misleading statements made in any document filed with the SEC.

Question 20

The procedure that an accountant performs to determine whether the financial statements of a business are materially accurate is a(n):

Accepted Answer

An audit is a detailed examination and verification of a company's financial statements to ensure that they are materially accurate. It involves reviewing accounting records and financial transactions, testing internal controls, and obtaining evidence from third-party sources. A review is less extensive and involves analyzing the financial statements using analytical procedures, inquiries with management, and limited review procedures. A compilation involves preparing financial statements based on information provided by management without independently verifying the data. Verification refers to confirming the accuracy of a specific transaction or item, while account sampling involves selecting and testing a sample of transactions to evaluate the overall accuracy of the financial records.

Quiz 51: Accountants' Liability