Question 1

Manufacturing Inc. hires Neri, an accountant, to maintain the company's financial records. Neri does not act negligently or fail to perform any duty but fails to discover that Ollie, the firm's chief finance officer, is embezzling funds from the firm. With respect to the corporation's losses, the accountant is

Accepted Answer

Since Neri, the accountant, did not act negligently or fail to perform any duty, she is not liable for the losses incurred by the corporation due to Ollie's embezzlement. The liability would typically rest with the individual committing the fraud, especially if the accountant fulfilled their duties without negligence.

Question 2

An accountant should destroy working papers on the completion of an audit to avoid the possibility of having to provide evidence in a suit in which the accountant's competence is challenged.

Accepted Answer

Accountants should retain working papers for a period of time as they serve as evidence of the audit work performed and the basis for the audit conclusions. Destroying them could be considered unethical and could also violate legal or professional requirements.

Question 3

Once an attorney-client relationship arises, to encourage frankness, all communications between the parties are privileged.

Accepted Answer

The attorney-client privilege protects most communications between clients and their lawyers from being disclosed to third parties, encouraging open and honest communication.

Question 4

An accountant is least likely to be held liable for accounting fraud if he or she

Accepted Answer

An accountant's failure to discover every impropriety in a client's books might not necessarily lead to liability for accounting fraud, especially if the accountant exercised due diligence and followed professional standards. In contrast, actively concealing information, failing to report suspicious activities, or directly engaging in fraudulent reporting would more likely result in liability.

Question 5

An accountant is liable for any omission in a registration statement to a person who suffers a loss on the securities described in the statement.

Accepted Answer

The answer of An accountant is liable for any omission...

Question 6

"A reasonably competent general practitioner of ordinary skill, experience, and capacity" is the normal standard of performance expected of

Accepted Answer

This standard describes the level of performance expected from professionals such as attorneys, where they are expected to perform their duties with a level of competence, skill, experience, and capacity that is considered reasonable and ordinary for their profession.

Question 7

In some states, an accountant is potentially liable to any user who relies on the professional's statement or report whether or not the reliance was foreseeable.

Accepted Answer

In most states, an accountant's liability to third parties is limited to those whom the accountant knew would rely on the financial statements, not just any foreseeable user.

Question 8

Because of the potential for significant losses to sellers and buyers, under both of the federal securities acts liability is imposed on accountants for all acts of negligence, including "mere" negligence.

Accepted Answer

Under the Securities Act of 1933, accountants can be held liable for "mere" negligence, but under the Securities Exchange Act of 1934, the standard is higher, requiring scienter (a form of intent or knowledge of wrongdoing) for liability to be imposed.

Question 9

Under the Private Securities Litigation Reform Act, an accountant who participates in, but is unaware of, illegal conduct may be liable for proportionately less than the entire loss.

Accepted Answer

The Private Securities Litigation Reform Act allows for proportionate liability, meaning an accountant unaware of illegal conduct may only be liable for the portion of the loss they are responsible for.

Question 10

The Public Company Accounting Oversight Board oversees the audit of public companies subject to securities laws in order to protect public investors.

Accepted Answer

The Public Company Accounting Oversight Board (PCAOB) was established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.

Question 11

An attorney who becomes aware that a client has violated securities laws must report the violation to the Securities Exchange Commission-which creates a potential conflict with the attorney-client privilege.

Accepted Answer

An attorney is required to report any violations of securities laws to the Securities Exchange Commission, even if it means breaking attorney-client privilege.

Question 12

An accounting firm can lawfully perform both auditing and non-auditing services for the same company at the same time because the firm could otherwise be exposed to potentially massive liability.

Accepted Answer

Performing both auditing and non-auditing services for the same company can create a conflict of interest, compromising the auditor's independence. Regulations such as the Sarbanes-Oxley Act in the U.S. restrict such practices to ensure audit integrity.

Question 13

It is a felony for anyone-not just accountants-to willfully make false statements in a tax return or to willfully assist others in preparing a false return.

Accepted Answer

Under U.S. law, it is a felony for any person to knowingly make false statements on a tax return or to assist someone else in doing so, as outlined in the Internal Revenue Code (IRC). This applies not only to accountants but to all individuals.

Question 14

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

Accepted Answer

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

Question 15

To avoid liability for securities violations, an accountant must use due diligence in preparing a financial statement included in a registration statement-merely asking questions of a corporate officer or director meets this standard.

Accepted Answer

Due diligence requires an accountant to conduct a thorough investigation and verification of the financial information, not just asking questions of corporate officers or directors.

Question 16

Dena, an accountant, contracts to perform services for Equipment Maker Inc. Dena acts in good faith and conforms to generally accepted accounting principles but makes an incorrect judgment. Dena is most likely

Accepted Answer

Dena acted in good faith and conformed to generally accepted accounting principles, which typically shields professionals from liability for honest errors in judgment.

Question 17

In most states, an attorney may be liable for negligence to a non-client who the attorney knows or reasonably should know will rely on the attorney's opinion.

Accepted Answer

An attorney may be held liable for negligence to a non-client if the attorney is aware, or should reasonably be aware, that the non-client will rely on the attorney's work or opinion. This is particularly true in cases where the attorney's work is intended to benefit or influence the non-client, such as in the preparation of documents like wills or real estate transactions where third parties may rely on the attorney's diligence and accuracy.

Question 18

Because working papers are the property of an accountant, a client for whom the documents were used and developed has no right of access to them.

Accepted Answer

Working papers are indeed prepared by an accountant for a specific engagement, but clients generally have a right to access those documents related to their financial information, especially when such documents are necessary for the continuation of their business or for compliance with legal requirements. The ownership and rights to access working papers can vary by jurisdiction and specific contractual agreements between the accountant and the client.

Question 19

Bell, an accountant, enters into a contract to provide services to Consumer Staples Inc. Bell fails to meet a regulatory deadline for the work. Required to pay a fine, the company files a suit against Bell. Most likely, the court will order

Accepted Answer

Bell's failure to meet a regulatory deadline, resulting in a fine for Consumer Staples Inc., constitutes a breach of contract. Therefore, the court is most likely to order Bell to compensate the firm for the damages incurred, which in this case is the amount of the fine.

Question 20

In most states, accountants are subject to liability for negligence not only to their clients but also to foreseen or known users of the accountants' reports.

Accepted Answer

Accountants can be held liable for negligence to both their direct clients and to any third parties that the accountants knew or should have foreseen would rely on their reports, such as investors or financial institutions, under the principle established in cases like Ultramares Corp. v. Touche and further developed in subsequent case law and state statutes.

Quiz 42: Professional Liability and Accountability

An accountant should destroy working papers on the completion of an audit to avoid the possibility of having to provide evidence in a suit in which the accountant's competence is challenged.

Once an attorney-client relationship arises, to encourage frankness, all communications between the parties are privileged.

An accountant is least likely to be held liable for accounting fraud if he or she

An accountant is liable for any omission in a registration statement to a person who suffers a loss on the securities described in the statement.

"A reasonably competent general practitioner of ordinary skill, experience, and capacity" is the normal standard of performance expected of

In some states, an accountant is potentially liable to any user who relies on the professional's statement or report whether or not the reliance was foreseeable.

Because of the potential for significant losses to sellers and buyers, under both of the federal securities acts liability is imposed on accountants for all acts of negligence, including "mere" negligence.

Under the Private Securities Litigation Reform Act, an accountant who participates in, but is unaware of, illegal conduct may be liable for proportionately less than the entire loss.

The Public Company Accounting Oversight Board oversees the audit of public companies subject to securities laws in order to protect public investors.

An attorney who becomes aware that a client has violated securities laws must report the violation to the Securities Exchange Commission-which creates a potential conflict with the attorney-client privilege.

An accounting firm can lawfully perform both auditing and non-auditing services for the same company at the same time because the firm could otherwise be exposed to potentially massive liability.

It is a felony for anyone-not just accountants-to willfully make false statements in a tax return or to willfully assist others in preparing a false return.

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

To avoid liability for securities violations, an accountant must use due diligence in preparing a financial statement included in a registration statement-merely asking questions of a corporate officer or director meets this standard.

Dena, an accountant, contracts to perform services for Equipment Maker Inc. Dena acts in good faith and conforms to generally accepted accounting principles but makes an incorrect judgment. Dena is most likely

In most states, an attorney may be liable for negligence to a non-client who the attorney knows or reasonably should know will rely on the attorney's opinion.

Because working papers are the property of an accountant, a client for whom the documents were used and developed has no right of access to them.

Bell, an accountant, enters into a contract to provide services to Consumer Staples Inc. Bell fails to meet a regulatory deadline for the work. Required to pay a fine, the company files a suit against Bell. Most likely, the court will order

In most states, accountants are subject to liability for negligence not only to their clients but also to foreseen or known users of the accountants' reports.