Question 1

The Sarbanes-Oxley Act applies to domestic, but not foreign, public accounting firms that provide auditing services to "issuers."

Accepted Answer

This statement is false. The Sarbanes-Oxley Act applies to both domestic and foreign public accounting firms that provide auditing services to "issuers," which are companies that issue securities registered under the Securities Exchange Act of 1934 or that are required to file reports under the Act.

Question 2

Jaime, an accountant, contracts to perform services for Kase. Jaime acts in good faith and conforms to generally accepted accounting principles, but makes a mistake in judgment. Jaime is most likely

Accepted Answer

Jaime acted in good faith and conformed to generally accepted accounting principles, which indicates that Jaime exercised reasonable care and skill in performing services for Kase. Mistakes in judgment may occur despite due care, and in such cases, the accountant is not liable for any resulting damages. Therefore, Jaime is not liable for the mistake made in judgment, regardless of whether a defalcation, fraud, or impropriety existed.

Question 3

An attorney may be liable in negligence to any third party who the attorney knows will rely on the attorney's work.

Accepted Answer

This is a well-established principle in the law of negligence known as the "foreseeable plaintiffs" rule. If an attorney knows that a third party will rely on their work, they have a duty to exercise reasonable care to ensure that the work is accurate and complete, and can be held liable if they fail to do so and the third party suffers harm as a result.

Question 4

Under the Sarbanes-Oxley Act, accountants must retain working papers relating to an audit or review for a certain period of time.

Accepted Answer

The Sarbanes-Oxley Act requires accountants to retain working papers relating to an audit or review for a period of seven years.

Question 5

In no states are communications between an accountant and his or her client privileged.

Accepted Answer

The answer of In no states are communications between an...

Question 6

Tiny is an accountant. Tiny's violation of generally accepted accounting principles and generally accepted auditing standards

Accepted Answer

Violations of generally accepted accounting principles and generally accepted auditing standards are considered prima facie evidence of negligence in the accounting profession. Thus, Tiny's violation of these standards would be evidence that they were negligent in their work as an accountant.

Question 7

An accountant who prepares a financial statement in good faith may avoid liability under Section 18 of the Securities Exchange Act of 1934.

Accepted Answer

Section 18 of the Securities Exchange Act of 1934 provides an exemption for accountants from liability if they prepare financial statements in good faith and have no reason to believe they misrepresent the financial condition of the company.

Question 8

An accountant's liability under the Securities Act of 1933 requires privity of contract with the purchaser of a security.

Accepted Answer

The Supreme Court ruling in the case of Hochfelder v. Ernst & Ernst clarified that accountants can be held liable under Section 10(b) of the Securities Exchange Act of 1934, even without privity of contract. However, the Securities Act of 1933 only imposes liability on those directly involved in the sale of the security, which includes the issuer, underwriter, and any person who offers or sells the security. Accountants are not included in this list and therefore cannot be held liable under the Securities Act of 1933.

Question 9

Lucille, an accountant, is subject to the accounting conventions, rules, and procedures that constitute generally accepted accounting principles (GAAP). GAAP are determined by

Accepted Answer

GAAP are determined by the Financial Accounting Standards Board (FASB). The International Accounting Standards Board (IASB) sets International Financial Reporting Standards (IFRS), which are used in many countries outside the United States. The American Bar Association and the American Institute of Certified Public Accountants may provide guidance and recommendations, but they do not establish GAAP.

Question 10

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

Accepted Answer

The answer of Penalties for aiding or assisting in the...

Question 11

Accountants may be subject to criminal penalties for violations of federal securities laws.

Accepted Answer

Accountants may be subject to criminal penalties for violations of federal securities laws, such as insider trading.

Question 12

A tax preparer that fails to give a taxpayer a copy of his or her tax return may be subject to a penalty under the Internal Revenue Code.

Accepted Answer

According to the Internal Revenue Code, a tax preparer who fails to provide a copy of the tax return to the taxpayer may be subject to a penalty.

Question 13

A failure to follow generally accepted accounting principles and generally accepted auditing standards is proof of a lack of due diligence.

Accepted Answer

Generally accepted accounting principles and generally accepted auditing standards establish the minimum level of diligence expected of accountants and auditors. Failure to comply with these standards is evidence of a lack of due diligence.

Question 14

Working papers are the documents through which a court orders an accountant to audit a public company.

Accepted Answer

Working papers are the documents prepared by the auditor during the course of an audit, not the documents through which a court orders an audit.

Question 15

An accountant is not liable for a misstatement to a purchaser of securities who knew of the misstatement but invested anyway.

Accepted Answer

The defense of "known loss" applies in cases where the plaintiff knew of the misstatement or omission at the time of investment and cannot recover damages from the accountant.

Question 16

Leslie, an accountant, enters into a contract to provide services to Marty. Leslie does not finish the work within the contract's deadline. Leslie is

Accepted Answer

Leslie is liable for breach of contract because they did not complete the work within the agreed-upon deadline. Being a professional does not exempt one from fulfilling the terms of a contract, and there is no indication that Marty's actions contributed to Leslie's failure to complete the work on time. The fact that the work took longer than foreseen does not excuse Leslie from fulfilling the terms of the contract.

Question 17

Rex, an accountant, enters into a contract to provide services to Sofi. Rex does not finish the work within the contract's deadline. Sofi pays a penalty as a result of the missed deadline and hires Trey to complete the job. Rex is most likely liable for

Accepted Answer

Rex breached the terms of the contract by not completing the work within the deadline. As a result, Sofi had to pay a penalty and hire someone else to complete the job. Rex is liable for both the penalty and the cost to hire Trey, as these are direct consequences of his breach of contract.

Question 18

An accountant is not liable for a misleading statement that affects the price of a security if the accountant acted in good faith.

Accepted Answer

Under the Securities Exchange Act of 1934, an accountant may not be held liable for a misleading statement related to a security if the accountant acted in good faith and had no knowledge that the statement was false or misleading. However, if the accountant acted with reckless disregard for the truth or knowingly participated in the making of a false statement, they may be held liable.

Question 19

An accountant's working papers are the documents that are used and developed during an audit.

Accepted Answer

An accountant's working papers are used and developed during an audit to support the findings and conclusions made in the audit report. They include items such as checklists, worksheets, and financial statements.

Question 20

An accountant's liability under the Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 requires privity of contract.

Accepted Answer

An accountant's liability under section 10(b) and rule 10b-5 does not require privity of contract. Accountants can be held liable to investors and other third parties who rely on their financial statements and other information. This is known as the "foreseeable plaintiff" standard, which holds accountants responsible for any potential harm that could be reasonably anticipated from their actions.

Quiz 34: Liability of Accountants Other Professionals