Question 1

Under common law in states using the Restatement of Torts rule,third-party users must prove gross negligence or fraud unless they classify themselves as third-party beneficiaries of the financial statements.

Accepted Answer

Under the Restatement of Torts rule, third-party users do not need to prove gross negligence or fraud; they only need to show that the accountant knew the financial statements would be used by them for a specific purpose.

Question 2

An unsettled issue of liability for CPA firms concerns audited financial information disseminated on the Internet.

Accepted Answer

The dissemination of audited financial information on the Internet poses a potential risk for CPA firms as they may be held liable for any inaccuracies or misstatements in the information provided.

Question 3

Under common law in states using the Ultramares rule,third-party users must prove gross negligence or fraud unless they are able to get themselves classified as third-party beneficiaries of the financial statements.

Accepted Answer

Under the Ultramares rule, third-party users cannot sue for negligence but can sue for fraud or gross negligence. However, if they can prove that they were intended beneficiaries of the financial statements, they can sue for any negligence.

Question 4

All of the following factors have led to increased litigation against the auditor except

Accepted Answer

less demanding auditing standards for detection of errors and regularities have not led to increased litigation against the auditor. In fact, less demanding standards may reduce the likelihood of litigation by providing less opportunity for potential errors or irregularities to occur. The other factors listed, such as class-action suits, increased complexity of accounting standards, and joint and several liability statutes, have all contributed to increased litigation against auditors.

Question 5

Which of the following is known as the failure to exercise reasonable care,thereby causing harm to another or to property?

Accepted Answer

Ordinary negligence is defined as the failure to exercise reasonable care, thereby causing harm to another or to property. Gross negligence involves a higher degree of carelessness than ordinary negligence. Fraud involves intentional deception for personal gain, and scienter is the knowledge of wrongdoing or intent to deceive.

Question 6

Which of the following terms refers to an intentional concealment or misrepresentation of a material fact that causes damage to those deceived?

Accepted Answer

Fraud refers to a deliberate and intentional act of deception or misrepresentation of a material fact that causes harm or damage to those who have been deceived. Gross negligence refers to a severe disregard for safety or responsibility, while ordinary negligence refers to a lack of reasonable care that causes harm. Breach of contract refers to a violation of a contractual agreement.

Question 7

The duty of care that third-party users of audited financial statements generally must prove differs between the various states based upon court cases.The foreseeable rule is the one most extensively utilized among the states.

Accepted Answer

The "foreseeable rule" is not the most extensively utilized standard; rather, the "restatement rule" and the "Ultramares doctrine" are more commonly applied in determining the duty of care owed by auditors to third-party users of financial statements.

Question 8

Thomas Leegins,CPA,purposely omitted the confirmation of accounts receivable because of his knowledge that management had grossly overstated this account.Accounts receivable are material to the balance sheet.Leegins is most likely guilty of which of the following?

Accepted Answer

Leegins is guilty of fraud because he intentionally omitted the confirmation of accounts receivable, knowing that management had overstated the account, which is a deliberate act of deception.

Question 9

In 2009,the SEC issued rules requiring companies to provide financial information in a form that can be easily downloaded directly into interactive spreadsheets to make it easier for investors to analyze and to assist in automating regulatory filings.

Accepted Answer

The statement accurately describes the 2009 SEC rules regarding financial information.

Question 10

A reasonable cause for action against the auditor for breach of contract may include all of the following except which of the following?

Accepted Answer

A breach of contract claim against an auditor typically arises when the auditor fails to perform the agreed-upon audit work or services. Violating client confidentiality, withdrawing from an audit without justification, and failure to provide the audit report on time are all potential breaches of contract. However, failure to discover an immaterial error would not usually be considered a breach of contract, as it does not fall within the scope of the auditor's obligations.

Question 11

A tort is a wrongful action against someone that results in harm to them.

Accepted Answer

A tort is a civil wrong or wrongful act by which someone's person or property is harmed, resulting in legal liability for the person who commits the tortious act. It includes intentional torts (e.g., assault, battery, false imprisonment) and negligence-based torts (e.g., medical malpractice, product liability).

Question 12

Jack Box,CPA,misinterpreted the results of several accounts receivable confirmations in the audit of Jones Company.Box would be guilty of which of the following?

Accepted Answer

Ordinary negligence refers to the failure to exercise reasonable care, which can include misinterpreting information without intent to deceive.

Question 13

Third-party users of audited financial statements generally must prove that they suffered a loss,reliance on the financial statements,and that the auditors knew or should have known that the financial statements were misstated.

Accepted Answer

This statement accurately reflects the legal requirements for third-party users to recover damages from auditors for a misstatement in audited financial statements. They must prove all three elements of loss, reliance, and knowledge or should have known on the part of the auditors.

Question 14

Sally Schultz,CPA,neglected to observe the taking of physical inventory when she audited Gordy Company.Inventory is material to the balance sheet.Schultz is most likely guilty of which of the following?

Accepted Answer

Neglecting to observe the taking of physical inventory when auditing is an example of gross negligence, which is a severe form of negligence where there is a complete disregard for professional standards and reasonable care. It is considered a more serious error than ordinary negligence, which is a failure to exercise reasonable care and competence, but less severe than fraud, where there is a conscious intent to deceive.

Question 15

Defensive auditing means taking special actions to avoid lawsuits.

Accepted Answer

Defensive auditing is a practice that involves taking steps to reduce the risk of legal action or liability. This may include ensuring that financial records are accurate and in compliance with relevant regulations, developing policies and procedures to minimize the risk of fraud and misconduct, and conducting internal audits to identify and address potential areas of risk. Defensive auditing is a proactive approach to risk management that can help protect organizations from legal liability and other adverse consequences.

Question 16

The Securities Act of 1933 deals with the initial registration of the issuance of new securities with the SEC and it requires plaintiffs to prove fraud or gross negligence.

Accepted Answer

The Securities Act of 1933 does require registration of new securities with the SEC, but it also imposes strict liability for any misstatements or omissions in the registration statement. Plaintiffs do not need to prove fraud or negligence in order to bring a claim under the Securities Act of 1933.

Question 17

The Securities Act of 1934 regulates the trading of securities after their initial issuance and it requires plaintiffs to prove fraud or gross negligence.

Accepted Answer

The Securities Act of 1934 does regulate the trading of securities after their initial issuance and it also requires plaintiffs to prove fraud or gross negligence. This is different from the Securities Act of 1933 which regulates the initial issuance of securities and imposes strict liability on issuers for material misstatements or omissions.

Question 18

The shareholders of a bank sue Joe Bush,CPA,for malpractice due to an audit failure that preceded the insolvency of the bank.The jury determines that Bush is 20 percent at fault and the bank management is 80 percent at fault.Bush is fully insured.Under joint and several liability,Bush will pay which of the following?

Accepted Answer

The answer of The shareholders of a bank sue Joe...

Question 19

Generally the courts have held auditors liable to third-party users when the auditor has been found guilty of fraud or gross negligence.

Accepted Answer

This statement is true. Courts have held auditors liable to third-party users in cases where the auditor has been found guilty of fraud or gross negligence.

Question 20

Most large U.S.CPA firms are affiliates of international organizations.Such organizational structures have important implications for legal liability,although the legal liability outcomes are not always predictable.

Accepted Answer

CPA firms' affiliation with international organizations can affect their legal liability, but the outcomes are not always certain or predictable.

Quiz 17: Professional Liability