Question 1

A broad interpretation of the rights of third-party beneficiaries holds that users the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract.This is known as the concept of

Accepted Answer

The concept of "foreseeable users" holds that individuals or entities that the auditor should have reasonably foreseen as potential users of the financial statements, even if they are not party to the contract, have the same rights as those with privity of contract. This broad interpretation expands the scope of potential beneficiaries beyond those specifically named in the contract.

Question 2

Three approaches to the application of the foreseen users' concept are (1)the Credit Alliance approach,(2)the Restatement of Torts approach,and (3)the foreseeable user approach.Summarize each of these three approaches.

Accepted Answer

The answer of Three approaches to the application of the...

Question 3

An example of auditor legal liability to third parties under common law would be the federal government prosecuting an auditor for knowingly issuing an incorrect audit report.

Accepted Answer

Auditor legal liability to third parties under common law typically involves civil actions brought by third parties (such as investors) who rely on the audit report, not criminal prosecutions by the federal government. Federal prosecutions would fall under statutory law, not common law.

Question 4

If an auditor is unsuccessful in using the lack of duty defense to have a case dismissed in a third-party suit,the preferred defense is

Accepted Answer

Nonnegligent performance is the preferred defense if an auditor cannot use the lack of duty defense. This defense asserts that the auditor performed their duties without negligence, adhering to the appropriate standards and procedures.

Question 5

A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated.This is an example of which of the following legal liability concepts?

Accepted Answer

This is an example of liability to third parties under common law, where a third party can sue an auditor for negligence if they suffered losses due to the auditor's failure to detect material misstatements in financial statements.

Question 6

The basic legal concept which was affirmed in the 1985 New York case,Credit Alliance,was that

Accepted Answer

The answer of The basic legal concept which was affirmed...

Question 7

Which of the auditor's defenses is ordinarily not available when lawsuits are filed by a third party?

Accepted Answer

Contributory negligence is not available as a defense when lawsuits are filed by a third party. This defense can only be used in cases where the plaintiff is also found to have contributed to their own loss or damages. Since a third party is not responsible for the audit engagement, they cannot be found to have contributed to any negligence on the auditor's part. The other defenses listed, such as absence of causal connections, nonnegligent performance, and lack of duty, may still be available depending on the circumstances of the case.

Question 8

The major conclusion of the 1931 Ultramares case was that

Accepted Answer

The answer of The major conclusion of the 1931 Ultramares...

Question 9

The 1136 Tenants case was a criminal case concerning a CPA's failure to uncover fraud during a financial statement audit.

Accepted Answer

The 1136 Tenants case was a civil case concerning a CPA's negligence in conducting an audit, not a criminal case about failing to uncover fraud.

Question 10

The broadest interpretation of the right of third-party beneficiaries is the primary user concept.

Accepted Answer

The broadest interpretation of the right of third-party beneficiaries is the creditor beneficiary concept, not the primary user concept. The primary user concept refers to the concept in trademark law that the first person to use a mark in commerce has priority over later users.

Question 11

Although there is confusion caused by the differing views of liability to third parties under common law,the movement is clearly away from the foreseeable user approach.

Accepted Answer

The statement correctly represents the trend in the movement of liability towards third parties under common law.

Question 12

Many litigation experts believe that a well written engagement letter significantly reduces the likelihood of adverse legal actions.

Accepted Answer

A well-written engagement letter helps clarify the scope of services, responsibilities, and expectations of both the client and the attorney, which can prevent misunderstandings and disputes that could lead to legal actions.

Question 13

Under common law,a foreseen user would be treated the same as

Accepted Answer

The given options are not clear, but based on the question, it can be inferred that a foreseen user would be treated the same as an intended user under common law. Option A is the only one containing the phrase "intended user" and therefore the best choice.

Question 14

The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties,an auditor (1)must know and intend that the work product would be used by the third-party for a specific purpose,and (2)the knowledge and intent must be evidenced by the auditor's conduct.

Accepted Answer

This is the correct definition of the Credit Alliance approach to foreseen users. The auditor must have knowledge and intent that their work product will be used by a specific third-party, and this must be evidenced by their conduct in order for them to be liable to that third-party.

Question 15

Under common law,an individual or company that (1)does not have a contract with an auditor,(2)is known by the auditor in advance of the audit,and (3)will use the auditor's report to make decisions about the client company has:

Accepted Answer

Under common law, third-party beneficiaries are allowed to sue auditors if they can establish privity of contract, which means having a direct contractual relationship with the auditor. However, in certain cases, such as when the third party is known by the auditor in advance of the audit and will rely on the auditor's report to make decisions about the client company, the third party may be able to claim that the auditor owed them a duty of care and therefore has the same rights against the auditor as a client. This is known as the "foreseen user" or "known user" exception to the privity rule. Therefore, the answer is D.

Question 16

A group typically included as "third parties" in common law is

Accepted Answer

The answer of A group typically included as "third parties"...

Question 17

Which of the following auditor's defenses usually means nonreliance on the financial statements by the user?

Accepted Answer

The defense of absence of causal connections means that any damages suffered by the user were not caused by the auditor's actions, but rather by other factors. This defense does not necessarily imply nonreliance on the financial statements by the user. The other defenses listed (lack of duty, non negligent performance, and contributory negligence) also do not necessarily imply nonreliance by the user.

Question 18

According to the principle established by the Restatement of Torts,foreseen users must be members of

Accepted Answer

The Restatement of Torts requires that the foreseeable users must be from a reasonably limited and identifiable user group. This means that the group of potential users that a reasonable person would anticipate to use a product should be limited and identifiable rather than open to any potential user group.

Question 19

Under the Ultramares doctrine,ordinary negligence is insufficient for liability to third parties unless the third party is

Accepted Answer

According to the Ultramares doctrine, a auditor can be held liable to third parties only if they are primary beneficiaries of the auditor's work. This means that the auditor knew or should have known that the third party would rely on the auditor's work for a specific purpose. Therefore, choice A is the best answer as it aligns with the primary beneficiaries concept.

Question 20

Under the Securities Exchange Act of 1934,which type of organization is required to submit audited financial statements to the SEC?

Accepted Answer

The answer of Under the Securities Exchange Act of 1934,which...

Quiz 5: Legal Liability