Question 1

If a client establishes fraud against a professional, he/she is more likely to receive:

Accepted Answer

If a client has established fraud against a professional, they are likely to receive compensatory and punitive damages. Compensatory damages are meant to reimburse the client for the losses they suffered due to the fraud. Punitive damages, on the other hand, are intended to punish the professional for their wrongdoing and discourage similar behavior in the future. Consequential damages might also be awarded in some cases, but they are not the only damages that the client would receive.

Question 2

Professionals are sued under securities law usually by:

Accepted Answer

Professionals are typically sued under securities law by third parties, such as investors or regulators, who may have suffered harm as a result of their actions or inactions. Clients may also bring lawsuits, but this is less common. Brokers and partners may be involved in securities-related lawsuits, but they are typically not the primary defendants.

Question 3

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

Section 11 of the Securities Act of 1933 holds auditors liable for any misstatements or omissions in the expertised portions of a registration statement. This includes financial statements and supporting schedules. The other options mentioned are not subject to Section 11 liability.

Question 4

If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, which of the following, if present, would be the CPA's best defense?

Accepted Answer

If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA,the CPA's best defense would be to prove that the false statements were immaterial.

Question 5

In which of the following statements concerning a CPA firm's action is scienter or its equivalent absent?

Accepted Answer

Performing substandard auditing procedures may indicate negligence or a lack of due care, but it does not necessarily imply the presence of scienter (intent to deceive, manipulate, or defraud). The other options all suggest some level of intent or knowledge of wrongdoing.

Question 6

In a state that uses the Restatement (Second) of Torts of 1965, who amongst the following may hold an accountant liable for common law negligence?

Accepted Answer

In states that use the Restatement (Second) of Torts of 1965, an accountant may be held liable for common law negligence by the client, a third party that the accountant knew would rely on their work for a particular purpose, and others who are in the same limited class as that third party. This is known as the "foreseeable user" approach. Therefore, Choice C is the correct answer.

Question 7

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

Accepted Answer

An auditor who issues an opinion regarding the financial statements of a company making a public distribution of securities is considered an expert under Section 11 of the Securities Act of 1933. This is because their opinion holds weight in the decision-making process of investors and is relied upon by them. The other options do not fit the definition of an expert under this section.

Question 8

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 9

Under the Restatement (Second) of Torts, which of the following nonclients may sue an accountant for professional negligence?

Accepted Answer

Under the Restatement (Second)of Torts,a creditor who was not known to an accountant but who used the financial statements for the same purpose as the bank whose use of the statements was known to the accountant may sue the accountant for professional negligence.

Question 10

A client may receive _____ damages for a breach of contract or negligence.

Accepted Answer

A client may receive compensatory damages for a breach of contract or negligence, which are meant to compensate them for the actual losses suffered as a result of the breach or negligence. Consequential damages, which are damages that result from the breach but are not a direct result of the breach itself, may also be awarded in some cases. Punitive damages, on the other hand, are awarded as a form of punishment to deter the party responsible from engaging in similar conduct in the future, and are typically not awarded in breach of contract or negligence cases.

Question 11

Which of the following is sufficient to establish that a professional has acted with scienter for purposes of common law fraud?

Accepted Answer

To establish scienter for common law fraud, it is not enough to show mere negligence or carelessness. Reckless ignorance of facts, on the other hand, is sufficient to prove that the professional had knowledge of their misstatement and intended to deceive.

Question 12

_____ 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. Section 18 of the Securities Exchange Act of 1934 provides for liability for false or misleading statements in periodic reports filed with the SEC, while Section 12(a)(2) of the Securities Exchange Act of 1934 provides for liability for misstatements or omissions of material fact in prospectuses or oral communications in connection with a public offering. Section 17(b) of the Securities Act of 1933 prohibits fraudulent activities in the offer or sale of securities.

Question 13

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

In a common law fraud case, the plaintiff (Safe) must prove that they justifiably relied on the financial statements in question. Privity of contract is not required for a common law fraud claim, as the plaintiff can be a third-party who was not directly involved in the contract. Contributory negligence may be a defense for the defendant (Brown), but it is not an element that the plaintiff must prove. Therefore, the best choice is D, as it is the only element that must be proven by the plaintiff in a common law fraud case.

Question 14

In which of the following contexts is a professional most likely to experience a nonclient action?

Accepted Answer

Nonclient actions are rarer outside the accountant context because the work product of nonaccounting professionals is infrequently used by others in an expectable way.As such,an accountant who prepares and/or audits financial statements of companies is most likely to experience nonclient action because those financial statements can be used among others,by banks for giving loans to companies,investors to buy securities,and investment bankers for valuation purposes.

Question 15

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 16

Ritz Co. wished to acquire Smart Inc. In conjunction with its plan of acquisition, Ritz hired Felix, a CPA, to audit the financial statements of Smart. Based on the audited financial statements and Felix's unqualified opinion, Ritz acquired Smart. Within six months, it was discovered that the inventory of Smart had been overstated by $500,000. Ritz commenced an action against Felix. Ritz believes that Felix failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality, but is unable to prove that Felix either intentionally deceived it or showed a reckless disregard for the truth. Ritz is also unable to prove that Felix had any knowledge that the inventory was overstated. Which of the following would provide Ritz with a proper basis for prevailing in a lawsuit against Felix?

Accepted Answer

Ritz can claim negligence on the part of Felix for failing to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality. The breach of contract can also be claimed as Felix was hired to audit the financial statements of Smart, and it was his duty to ensure their accuracy. However, Ritz cannot prove that Felix intentionally deceived or showed a reckless disregard for the truth, so claims of fraud or gross negligence would not be applicable.

Question 17

Which of the following tests requires a professional to know the name of the nonclient who will use his/her work product and the particular purpose for which that person will use the work product?

Accepted Answer

Under the primary benefit test,a professional must know four things: (1)the name of the person who will use his/her work product, (2)the particular purpose for which that person will use the work product, (3)the extent of the use,and (4)the client has the primary intent that the user use the work product.

Question 18

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 19

The central requirement for the primary benefit test is:

Accepted Answer

The primary benefit test is used to determine whether a third-party beneficiary can enforce a contract, and it requires privity of contract between the beneficiary and the promisee. The other choices are not relevant to this test.

Question 20

In a state that has adopted the Ultramares rule and uses the primary benefit test, who amongst the following may hold an accountant liable for common law negligence?

Accepted Answer

In a state that has adopted the Ultramares rule and uses the primary benefit test,only the client and a third party that an accountant knew would rely on the accountant's work for a particular purpose may hold the accountant liable for common law negligence.

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