Question 1

West & Co. ,a large CPA firm,was engaged by Sand Corp.to audit its financial statements.West issued an unqualified opinion on Sand's financial statements.Reed is a securities investor who relied upon the statements when purchasing Sand stocks.After incurring major losses on Sand stocks,Reed accused Sand of making negligent misrepresentations in the financial statements.West was not aware of the misrepresentations nor was it negligent in performing the audit.If Reed sues West for damages,based on Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934,West will:

Accepted Answer

To prove liability under Section 10(b)of the Securities Exchange Act of 1934 and Securities Exchange Act Rule 10b-5,the defendant must act with scienter.For some courts,reckless misconduct is sufficient to prove scienter.Negligence,however,is not enough.Since West was not aware of the misrepresentations in the financial statements nor was it negligent in performing the audit,Reed will not be able to prove scienter on West's part.So,if Reed sues West for damages,West will prevail.

Question 2

The maximum penalty for a criminal violation of the 1933 Act is a:

Accepted Answer

The maximum penalty for a criminal violation of the 1933 Act is a $10,000 fine and five years' imprisonment.

Question 3

Who amongst the following is an "expert" under Section 11 of the Securities Act of 1933?

Accepted Answer

The most common "expert" under Section 11 of the Securities Act of 1933 is an auditor who issues an opinion regarding financial statements of a company making a public distribution of securities.

Question 4

Gold,CPA,rendered an unqualified opinion on the 1987 financial statement of Eastern Power Co.Egan purchased Eastern bonds in a public offering subject to the Securities Act of 1933.The registration statement filed with the SEC included the financial statements.Gold is being sued by Egan under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements.To prevail,Egan must prove:

Accepted Answer

To prevail against Gold,CPA (a professional)under Section 11 of the Securities Act of 1933,Egan (a third party,nonclient)need not prove either scienter or reliance.

Question 5

Under the Racketeer Influenced and Corrupt Organizations Act (RICO),a pattern of fraud is proved by the commission of:

Accepted Answer

Under the Racketeer Influenced and Corrupt Organizations Act (RICO),a pattern of fraud is proved by the commission of two predicate offenses within a 10-year period.

Question 6

Hamish invested in the securities of the ABC Corporation (ABC).He lost a great deal of money on those securities after ABC's president admitted that financial statements about the profitability of ABC had been materially exaggerated.Andy Accountant (AA)had audited those statements and had issued an unqualified opinion that they complied with GAAS and GAAP.Hamish has sued AA using Section 10(b)of the Securities Exchange Act of 1934 as the legal basis of his/her suit.To succeed,Hamish must prove that:

Accepted Answer

It is required that the defendant (professional)has acted with scienter in order to prove liability of the defendant to a third person (nonclient)under Securities Exchange Act Rule 10b-5,pursuant to Section 10(b)of Securities Exchange Act of 1934.

Question 7

An individual may be fined up to _____ and imprisoned for up to _____ for a criminal violation of the 1934 Act.

Accepted Answer

An individual may be fined up to $5 million and imprisoned for up to 20 years for a criminal violation of the 1934 Act.

Question 8

Individuals convicted of a RICO (Racketeer Influenced and Corrupt Organizations Act)violation may be:

Accepted Answer

Individuals convicted of a RICO (Racketeer Influenced and Corrupt Organizations Act)violation may be fined up to $250,000 and imprisoned up to 20 years.

Question 9

A(n)_____ fraud applies when a professional misstates a material fact and recklessly or grossly negligently fails to ascertain the truth of the statement.

Accepted Answer

Some courts recognize a tort called constructive fraud that applies when a professional misstates a material fact.For a misstatement to amount to constructive fraud,the professional must have recklessly or grossly negligently failed to ascertain the truth of the statement.

Question 10

Under Section 11 of the Securities Act of 1933,in order to establish the liability of an auditor who prepared a defective registration statement,a plaintiff must prove that:

Accepted Answer

Under Section 11 of the Securities Act of 1933,in order to establish liability of an auditor who prepared a defective registration statement,a plaintiff must prove that he/she purchased securities issued pursuant to the defective registration statement.

Question 11

Brown,a CPA,helped Cook organize a partnership that was actually an abusive tax shelter.Brown induced clients to participate by making false statements concerning the eligibility of deductions and tax credits.As a result of these activities,Cook derived $100,000 gross income and Brown derived $50,000 gross income.According to federal tax law,what is Brown's penalty for promoting this abusive tax shelter?

Accepted Answer

According to the federal tax law,the penalty for promoting abusive tax shelters is $1,000,or 100 percent of the defendant's income from his/her participation in the tax shelter,whichever is lesser.As such,Brown's penalty for promoting an abusive tax shelter would be $1,000.

Question 12

Nast Corp.orally engaged Baker & Co. ,CPAs,to audit its financial statements.The management of Nast informed Baker that it suspected the accounts receivable were materially overstated.Although the financial statements audited by Baker did,in fact,include a materially overstated accounts receivable balance,Baker issued an unqualified opinion.Nast relied on the financial statements in deciding to obtain a loan from Century Bank to expand its operations.Nast has defaulted on the loan and has incurred a substantial loss.If Nast sues Baker for negligence in failing to discover the overstatement,Baker's best defense would be that:

Accepted Answer

Since the financial statements audited by Baker included a materially overstated accounts receivable balance and Baker issued an unqualified opinion,Baker's best defense against Nast's claim of negligence would be that Baker performed the audit in accordance with generally accepted auditing standards (GAAS).

Question 13

Which of the following is correct concerning qualified opinions,disclaimers of opinions,and unaudited financial statements?

Accepted Answer

When an auditor issues a qualified opinion regarding audited financial statements,the auditor is relieved of responsibility for mistakes in financial statements only to the extent the qualification is specifically expressed in the opinion letter.

Question 14

A professional has duty to perform their contractual duties to what standard for his/her client?

Accepted Answer

As a party to a contract with the client,a professional owes a duty to the client to perform as has been agreed to perform.

Question 15

For proving liability of a professional under _____,the plaintiff need not prove reliance on the wrongful conduct.

Accepted Answer

For proving liability of a professional under Section 12(a)(2)of the Securities Act of 1933,the plaintiff need not prove reliance on the wrongful conduct.

Question 16

_____ imposes liability on underwriters and experts for misstatements or omissions of material fact in Securities Act registration statements.

Accepted Answer

Section 11 of the Securities Act of 1933 imposes liability on underwriters and experts for misstatements or omissions of material fact in Securities Act registration statements.

Question 17

Who amongst the following can be held liable under Section 12(a)(2)of the Securities Act of 1933?

Accepted Answer

Underwriters can be held liable under Section 12(a)(2)of the Securities Act of 1933 because they have privity of contract with nonclients (they actively solicit sales of securities)and they have the requisite financial stake in the sale (they usually receive compensation for their services in the form of a commission or a spread).

Question 18

Brown & Co. ,a CPA,issued an unqualified opinion on the financial statement of its client,King Corp.Based on the strength of King's financial statements,Safe Bank loaned King $500,000.Brown was unaware that Safe would receive a copy of the financial statements or that they would be used in obtaining a loan by King.King defaulted on the loan.If Safe commences an action for common law fraud against Brown,then to be successful,Safe must prove that in addition to other elements it:

Accepted Answer

Under common law,a professional's liability for constructive fraud extends to all persons who justifiably rely on the misstatement provided by the professional.As such,to be successful in an action for common law fraud against Brown,Safe must prove in addition to other elements that it justifiably relied on the financial statements of King on which Brown had issued an unqualified opinion.

Question 19

For proving liability of a professional under _____,privity of contract between the plaintiff and the defendant is required.

Accepted Answer

For proving liability of a professional under Section 12(a)(2)of Securities Act of 1933,privity of contract between the plaintiff and the defendant apparently is required,because Section 12(a)(2)states that the defendant is liable to the person purchasing the security from him/her.

Question 20

Under Section 11 of the Securities Act of 1933,an auditor who issues an opinion regarding financial statements of a company making a public distribution of securities can be held liable for errors in the expertised portions of the:

Accepted Answer

Under Section 11 of the Securities Act of 1933,an auditor who issues an opinion regarding financial statements of a company making a public distribution of securities can be held liable for errors in the expertised portions of the registration statement.

Quiz 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

The maximum penalty for a criminal violation of the 1933 Act is a:

Who amongst the following is an "expert" under Section 11 of the Securities Act of 1933?

Under the Racketeer Influenced and Corrupt Organizations Act (RICO) ,a pattern of fraud is proved by the commission of:

An individual may be fined up to _ and imprisoned for up to _ for a criminal violation of the 1934 Act.

Individuals convicted of a RICO (Racketeer Influenced and Corrupt Organizations Act) violation may be:

A(n) _____ fraud applies when a professional misstates a material fact and recklessly or grossly negligently fails to ascertain the truth of the statement.