Question 1

Which of the following does not contain provisions that may serve as a basis for legal actions against auditors?

Accepted Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act primarily focuses on financial regulatory reform aimed at reducing systemic risk, increasing transparency, and protecting consumers. It does not specifically target auditors or contain provisions that serve as a basis for legal actions against them, unlike the other options which directly relate to securities laws and auditor responsibilities.

Question 2

There is a public perception that auditors guarantee the accuracy of the financial statements they have audited and guarantee the financial viability of the business.

Accepted Answer

True

Question 3

Auditors have generally not been held liable for criminal acts in the courts.

Accepted Answer

Auditors can be held liable for criminal acts if they knowingly participate in fraudulent activities, fail to comply with legal standards, or engage in misconduct. The extent of liability depends on the jurisdiction and specific circumstances of the case.

Question 4

Audit risk is the risk there will be an audit failure for a given audit engagement.

Accepted Answer

The answer of Audit risk is the risk there will...

Question 5

Which of the following factors does not explain why the number of lawsuits and the sizes of awards to plaintiffs in cases involving CPA firms remains high even today?

Accepted Answer

All of the factors listed contribute to the high number of lawsuits and the sizes of awards in cases involving CPA firms.

Question 6

When an audit has failed to uncover material misstatements and the wrong type of audit opinion is issued, it is not appropriate to question whether the auditor exercised due professional care in the performance of the audit.

Accepted Answer

If an audit has failed to uncover material misstatements and the wrong type of opinion is issued, it may be appropriate to question whether the auditor exercised due professional care in the performance of the audit. The auditor may have made errors or not followed appropriate auditing procedures, which may have contributed to the failure to uncover material misstatements.

Question 7

Discuss at least three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

Accepted Answer

The answer of Discuss at least three major factors that...

Question 8

There has been, and continues to be, legislative efforts to control litigation costs against CPA firms by discouraging nonmeritorious lawsuits.

Accepted Answer

There have been efforts to control litigation costs against CPA firms by discouraging nonmeritorious lawsuits, as this can help protect these firms from excessive legal fees and damages that could negatively impact their business and reputation. These efforts have included changes to legal standards for bringing claims against CPAs, as well as increased awareness and training for both accounting professionals and their clients about the potential risks and benefits of litigation. However, it is important to note that there is always a risk of lawsuits and legal challenges in any industry, and CPA firms must remain vigilant and proactive in managing these risks to ensure their long-term success and profitability.

Question 9

Audit risk is avoidable, as long as the auditor performs the audit in accordance with auditing standards.

Accepted Answer

Audit risk cannot be completely avoided even with the best adherence to auditing standards because there is always a possibility of material misstatements or fraud not being detected during the audit. However, the use of appropriate audit procedures and techniques can help to reduce the level of audit risk to an acceptable level.

Question 10

The term "expectation gap" refers to the difference in the results of an audit between what an auditor expects and what users of the financial statements audited by the auditor expect.

Accepted Answer

The statement correctly defines the concept of expectation gap as it relates to auditing.

Question 11

Which of the following is an accurate statement regarding audit risk, audit failure, and business failure?

Accepted Answer

Audit risk is the possibility that the audit opinion is incorrect or that material misstatements are not detected. It cannot be completely eliminated due to the inherent limitations of the audit process, such as the use of sampling and the possibility of fraud. Audit failure occurs when the auditor issues an incorrect opinion, and it can result in legal action and damage to the auditor's reputation. Business failure is a separate issue and may or may not be related to audit failure.

Question 12

A(n) ________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards.

Accepted Answer

An audit failure occurs when an auditor issues an incorrect opinion, either because they did not perform the audit in compliance with the auditing standards or because they missed material misstatements in the financial statements.

Question 13

Many CPA firms have strategically decided to settle lawsuits brought against them out of court in order to avoid adverse publicity and costly legal fees.

Accepted Answer

Many CPA firms may choose to settle lawsuits out of court as a strategic decision to avoid negative press and expensive legal fees.

Question 14

The expectation gap

Accepted Answer

The expectation gap refers to the difference between what the public and financial statement users believe auditors are responsible for and what auditors actually believe their responsibilities entail. This gap can lead to misunderstandings about the auditor's role, often resulting in unwarranted lawsuits when users' expectations are not met, even if the auditor has fulfilled their professional responsibilities.

Question 15

The term "business failure" has basically the same meaning as "audit failure" as they pertain the auditing profession.

Accepted Answer

The term "business failure" refers to a company's inability to meet its financial obligations or generate profits. On the other hand, "audit failure" refers to situations where auditors fail to provide an accurate report on a company's financial statements. While the two concepts are related to the overall performance of a business, they have different meanings and implications.

Question 16

The term "audit failure" refers to the situation when the auditor issues an incorrect audit opinion that a qualified auditor, following auditing standards, would have not issued.

Accepted Answer

This is the correct definition of an audit failure.

Question 17

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Accepted Answer

Audit failure refers to the situation where the auditor does not follow auditing standards, resulting in a failure to detect material misstatements in the client's financial statements.

Question 18

Which of the following factors does not contribute to the number of lawsuits against auditors?

Accepted Answer

The simplicity of auditing and accounting functions is not a factor that contributes to the number of lawsuits against auditors. In fact, the complexity of these functions and the potential for errors or fraud are factors that increase the risk of litigation. The other options (A, B, and D) all contribute to the increase in lawsuits against auditors.

Question 19

The auditor generally owes a duty of care to third parties who are part of a limited group of persons whose reliance is "foreseen" by the auditor.

Accepted Answer

The auditor is responsible for exercising reasonable care and skill in performing the audit and owes a duty of care to third parties whose reliance is "foreseeable" by the auditor. However, this duty is limited to a certain group of persons and not to the general public.

Question 20

Since the Sarbanes-Oxley Act of 2002, both the number of lawsuits and the sizes of awards to plaintiffs in the courts have been reduced against auditors.

Accepted Answer

The answer of Since the Sarbanes-Oxley Act of 2002, both...

Quiz 5: Legal Liability