Question 1

Adam claimed that N & A, its accounting firm, negligently prepared an audit. To hold the accounting firm liable, which of the following elements must be established?

Accepted Answer

Negligence is defined as the failure to exercise reasonable care. To hold N & A liable for negligent audit preparation, it must be established that they failed to exercise due care in performing their duties. Choice A (scienter or guilty knowledge) refers to intentional or knowing misconduct, which is not required for a negligence claim. Choice B (a fiduciary relationship) is a legal relationship of trust, which may exist between an accounting firm and its client but is not necessary to establish negligence. Choice D (an executed engagement letter) is a contractual agreement between the accounting firm and the client, which establishes the scope of services but does not determine liability for negligence.

Question 2

Rick prepared financial statements for MegaCorp knowing that it was going to use his statements to apply for a loan with Big Bank. When Big Bank turned MegaCorp down, it applied to Fourth Bank for a loan. MegaCorp presented the statements prepared by Rick to Fourth Bank, which gave the company a loan. It was discovered that Rick was negligent in preparing the statements, and Fourth Bank sued Rick. Under which of the following tests is Rick liable?

Accepted Answer

Rick is liable under both the foreseeable doctrine and the Restatement doctrine because these doctrines hold that an accountant is liable to third parties who are not in privity of contract but whose reliance on the financial statements was reasonably foreseeable (foreseeable doctrine) or who are intended users of the financial statements (Restatement doctrine). Since Fourth Bank relied on Rick's negligently prepared financial statements, these doctrines would support Fourth Bank's claim against Rick.

Question 3

Under SOX, accountants for public companies must keep all audit work papers for at least

Accepted Answer

Under SOX, accountants for public companies must keep all audit work papers for at least seven years. This includes all documentation related to the planning, performance, and results of the audit, as well as communications with management and other relevant parties. This requirement helps ensure accountability and transparency in financial reporting and provides a basis for future audits and investigations.

Question 4

GBH, an accounting firm, was hired to prepare financial statements for E-treme. GBH

Accepted Answer

Working papers prepared by an accounting firm during an audit or financial statement preparation are considered the property of the accounting firm. However, when the client, in this case, E-treme, is the subject of those working papers, they have a right to access those documents. This access is based on the understanding that the documents pertain to their financial information and may be necessary for their own records, legal reasons, or for conducting further audits or financial analyses. There's no requirement for a court order or permission from the AICPA for the client to access their own financial information as documented in the working papers.

Question 5

An auditor who determines a company is materially misstating certain items on its financial statements should issue a(n)

Accepted Answer

An adverse opinion should be issued when the auditor determines that the financial statements are materially misstated and the misstatements are pervasive, or when the auditor is unable to obtain sufficient evidence to support a conclusion about the financial statements.

Question 6

Discuss how SEC rules affect the legal and the ethical relationship between accountants and the companies they audit.

Accepted Answer

The answer of Discuss how SEC rules affect the legal...

Question 7

The IRS files criminal charges against Rich for evasion of federal taxes. Rich's accountant, Sonya, is summoned to appear in court to testify against Rich. The state where the incident occurred recognizes an accountant-client privilege. Does Sonya have to testify in federal court against her client?

Accepted Answer

Federal courts do not recognize a state-specific accountant-client privilege in criminal tax cases, so Sonya would have to testify against her client in federal court.

Question 8

John is a CPA in charge of auditing his client, McMillen & Co. John's duty of care to McMillen will most likely be breached if John

Accepted Answer

John's duty of care to McMillen requires him to follow generally accepted auditing standards (GAAS) to ensure that the audit is conducted with due care and in accordance with professional standards. Failure to adhere to GAAS can result in a breach of John's duty of care to McMillen. Choices A, B, and C are not necessarily breaches of a CPA's duty of care, although they could potentially result in liability if they cause harm to the client.

Question 9

Penalties on accountants for wrongdoing in the preparation of tax returns are imposed by the

Accepted Answer

Penalties on accountants for wrongdoing in the preparation of tax returns are imposed by the Internal Revenue Code, which governs all aspects of federal taxation in the United States. This includes penalties for inaccurate or fraudulent tax filings. The Federal Bureau of Investigation is responsible for investigating and bringing charges in cases of tax fraud, but it is the Internal Revenue Code that specifies the penalties that can be imposed. The Sarbanes-Oxley Act pertains primarily to corporate governance and financial reporting, while GAAP (Generally Accepted Accounting Principles) provides rules and guidelines for financial accounting and reporting.

Question 10

The accounting firm of Gray & Co. did accounting work for both Regional Bank and Carter Electronics. Without Carter's knowledge or approval, Gray & Co. discussed Carter's financial problems with Regional Bank. In this situation, Gray & Co.

Accepted Answer

Gray & Co. breached a legal obligation to keep client information confidential by discussing Carter Electronics' financial problems with Regional Bank without Carter's consent. This violates the confidentiality principle in accounting and legal standards regarding client information.

Question 11

An engagement letter is a written contract

Accepted Answer

An engagement letter is a written contract between an accountant and client that outlines the terms of their professional relationship, including services to be provided, fees, and responsibilities of both parties. It does not involve marriage, a corporation, or the AICPA, and while it establishes expectations, it does not necessarily create a fiduciary duty on its own.

Question 12

Which statement best describes the 1934 Act's position on whistleblowing?

Accepted Answer

The 1934 Act, specifically in the context of securities law and regulation, emphasizes the importance of auditors communicating with a client's board of directors if they suspect any illegal acts. This is to ensure that the board is aware of potential issues and can take appropriate action.

Question 13

Larry is a certified public accountant in a firm that audits public companies. Larry is accused of unethical conduct. Is Larry required to abide by the ethical standards of the Public Company Accounting Oversight Board?

Accepted Answer

As a certified public accountant auditing public companies, Larry is required to abide by the ethical standards established by the Public Company Accounting Oversight Board (PCAOB). The PCAOB is responsible for setting both audit standards and ethical guidelines for accountants who audit public companies. Therefore, Larry must comply with the PCAOB's ethical standards in addition to its audit rules.

Question 14

GBH, an accounting firm, was hired to prepare financial statements for E-treme. Great State Bank has asked to see GBH's working papers since it is thinking about extending a $4 million line of credit to E-treme. Which of the following statements is correct?

Accepted Answer

GBH cannot show the bank the working papers without E-treme's permission because the working papers are the property of the accounting firm and contain confidential client information.

Question 15

In which of the following cases will the federal accountant-client privilege protect the information from being disclosed?

Accepted Answer

The answer of In which of the following cases will...

Question 16

The Big Four accounting firms spend about what percentage of their revenue on litigation, including settlements and insurance?

Accepted Answer

The answer of The Big Four accounting firms spend about...

Question 17

Which of the following is NOT a provision of the Sarbanes-Oxley Act of 2002?

Accepted Answer

The American Institute of Certified Public Accountants (AICPA) was established long before the Sarbanes-Oxley Act of 2002 and is not a provision of the Act.

Question 18

Sally prepared financial statements for MegaCorp knowing that the company would be using her statements when applying for a loan at Big Bank. It is discovered she was negligent in preparing the statements, and Big Bank sues her. Sally is liable under the

Accepted Answer

The answer of Sally prepared financial statements for MegaCorp knowing...

Question 19

If a plaintiff is successful in proving that an auditor has violated Section 10(b) of the 1934 Securities Exchange Act, the auditor has

Accepted Answer

Section 10(b) of the 1934 Securities Exchange Act prohibits fraud in the purchase or sale of securities. If a plaintiff successfully proves that an auditor has violated this section, the auditor would be held responsible for their own actions and would have primary liability. Secondary liability would occur if another party, such as a client or co-conspirator, was also found to be responsible for the violation. Contingent liability refers to a potential liability that may or may not occur depending on future events. Rebuttable liability refers to liability that can be challenged or disproven through evidence or argument.

Question 20

Criminal liability for accountants

Accepted Answer

Criminal liability for accountants is possible under the Securities Act of 1933, the 1934 Act, state securities laws, and the Internal Revenue Code. Violations of these laws may result in fines, imprisonment, or both. However, it is important to note that not all violations may result in criminal liability and civil liability may also be imposed. Violation of the accountant-client privilege under federal law would not result in criminal liability, but rather could result in professional disciplinary action.

Quiz 27: Accountants Liability