Question 1

Rick prepared financial statements for MegaCorp knowing that it was going to use his statements to apply for a loan with Big Bank.When Big Bank turned MegaCorp down,it applied to Fourth Bank for a loan.MegaCorp presented the statements prepared by Rick to Fourth Bank which gave the company a loan.It was discovered that Rick was negligent in preparing the statements,and Fourth Bank sued Rick.Under which of the following tests is Rick liable?

Accepted Answer

Rick would be liable under both the foreseeable doctrine and the Restatement doctrine because he knew that MegaCorp was going to use his statements to apply for a loan, and he was negligent in preparing the statements.

Question 2

A study by the Government Accountability Office found:

Accepted Answer

The study by the Government Accountability Office found that the Big Four accounting firms have substantial market power, as they audit 97 percent of public companies with over $250 million in sales. There is no evidence of collusion or a direct link between consolidation and a decline in independence or an increase in audit fees.

Question 3

If a plaintiff is successful in proving that an auditor has violated Section 10(b)of the 1934 Act,the auditor has:

Accepted Answer

If a plaintiff successfully proves that an auditor has violated Section 10(b) of the 1934 Act, the auditor has primary liability. This means that the auditor is directly responsible for the damages caused to the plaintiff as a result of the violation. The auditor cannot shift their liability to any other party and must pay the damages awarded to the plaintiff.

Question 4

Criminal liability for accountants:

Accepted Answer

Criminal liability for accountants is possible under the Securities Act of 1933, the 1934 Act, state securities laws, and the Internal Revenue Code. This means that an accountant can face criminal charges and penalties for violating these laws. However, criminal liability is not an option under all laws and there may be only civil liability in some cases. The violation of the accountant-client privilege under federal law does not necessarily result in criminal liability, but rather may result in disciplinary action by licensing boards.

Question 5

A CPA's duty of care to a client most likely will be breached when the CPA:

Accepted Answer

A CPA's duty of care to a client includes performing professional services with due care and in accordance with GAAS. Failing to follow GAAS could result in a breach of the duty of care. Giving an oral report instead of written report or giving incorrect advice based on an honest error in judgment may not necessarily breach the duty of care, as long as the CPA acted in good faith and with due care. Failing to give tax advice that would save the client money may be a missed opportunity, but it may not necessarily breach the duty of care.

Question 6

An engagement letter is a written contract:

Accepted Answer

An engagement letter is a written agreement between an accountant and client that defines the scope of services to be provided, the responsibilities of both the accountant and the client, the fees to be charged, and other relevant terms and conditions. It is intended to establish a professional relationship between the accountant and client and create fiduciary duty.

Question 7

The IRS files criminal charges against Rich for evasion of federal taxes.Rich's accountant,Sonya,is summoned to appear in court to testify against Rich.The state where the incident occurred recognizes an accountant-client privilege.Does Sonya have to testify in federal court against her client?

Accepted Answer

Federal courts do not recognize state-specific privileges such as an accountant-client privilege when it comes to federal crimes, including tax evasion. Therefore, Sonya would have to testify against Rich in federal court despite the state's accountant-client privilege.

Question 8

GBH,an accounting firm,was hired to prepare financial statements for E-treme.GBH:

Accepted Answer

Working papers prepared by an accounting firm during an audit or other financial analysis are considered the property of the firm. However, when the client, in this case, E-treme, is the subject of those papers, the firm must allow the client access to them. This is because the client has a vested interest in the information contained within those papers, which pertain to their financial affairs.

Question 9

Which of the following is not a provision of the Sarbanes-Oxley Act of 2002?

Accepted Answer

The establishment of the American Institute of Certified Public Accountants and the development of ethical guidelines in a Code of Professional Conduct are not provisions of the Sarbanes-Oxley Act. The other options listed are provisions of the act.

Question 10

To prevail under Section 11 of the 1933 Securities Act,the plaintiff must prove:

Accepted Answer

The plaintiff must prove that the registration statement contained a material misstatement or omission and that the plaintiff lost money.

Question 11

In which of the following cases will the federal accountant-client privilege protect the information from being disclosed?

Accepted Answer

The answer of In which of the following cases will...

Question 12

GBH,an accounting firm,was hired to prepare financial statements for E-treme.Great State Bank has asked to see GBH's working papers.Great State Bank is thinking about extending a $4 million line of credit to E-treme.GBH:

Accepted Answer

GBH cannot show the bank the working papers unless E-treme gives permission because the working papers are confidential and belong to the client, E-treme.

Question 13

Great State Bank claimed that Wiles Accounting committed fraud in the preparation of an audit.To hold the accounting firm liable,which of the following elements must be established?

Accepted Answer

To hold the accounting firm liable for fraud, it must be established that the firm had knowledge or reckless disregard of the truth, meaning that they intentionally provided false information or acted with deliberate ignorance of the truth. A fiduciary relationship or an executed engagement letter may be relevant in other types of liability claims against an accounting firm, but they are not necessary elements in a fraud claim. Failure to exercise due care may establish liability for negligence but not for fraud.

Question 14

Who owns and controls an accountant's working papers?

Accepted Answer

In theory, the client owns and controls an accountant's working papers. However, in some situations, the accountant may have the right to retain the papers until their fees are paid. Legal and ethical guidelines must also be considered. The IRS and AICPA do not own or control an accountant's working papers.

Question 15

Adam claimed that N & A,its accounting firm,negligently prepared an audit.To hold the accounting firm liable,which of the following elements must be established?

Accepted Answer

In order to hold the accounting firm liable for negligent preparation of the audit, it must be established that they failed to exercise due care. Scienter or guilty knowledge is not required in a claim of negligence, a fiduciary relationship would only be relevant in certain circumstances, and an executed engagement letter is not a necessary element in proving negligence.

Question 16

The Big Four accounting firms spend about what percentage of their revenue on litigation,including settlements and insurance?

Accepted Answer

The answer of The Big Four accounting firms spend about...

Question 17

An auditor who determines a company is materially misstating certain items on its financial statements should issue:

Accepted Answer

If an auditor determines that a company is materially misstating certain items on its financial statements, the auditor should issue an adverse opinion. This is because an adverse opinion indicates that the financial statements are materially misstated and do not accurately reflect the financial position of the company. An adverse opinion is the most severe type of audit opinion a company can receive.

Question 18

Larry is a certified public accountant in a firm which audits public companies.Larry is accused of unethical conduct.Is Larry required to abide by the ethical standards of the Public Company Accounting Oversight Board?

Accepted Answer

As a certified public accountant auditing public companies, Larry is required to abide by the ethical standards of the Public Company Accounting Oversight Board (PCAOB). The PCAOB establishes both audit rules and ethical guidelines for public company auditors. Therefore, Larry must adhere to the ethical standards set forth by the PCAOB and can be held liable for any violation of those standards.

Question 19

The accounting firm of Gray & Co.did accounting work for both Regional Bank and Carter Electronics.Without Carter's knowledge or approval,Gray & Co.discussed Carter's financial problems with Regional Bank.Gray & Co.:

Accepted Answer

Accounting firms have a legal obligation to keep all client information confidential. By discussing Carter's financial problems with another client, Gray & Co. breached this obligation.

Question 20

Sally prepared financial statements for MegaCorp knowing that the company would be using her statements when applying for a loan at Big Bank.It is discovered she was negligent in preparing the statements and Big Bank sued her.Sally is liable under the:

Accepted Answer

The answer of Sally prepared financial statements for MegaCorp knowing...

Quiz 27: Accountants' Liability