Question 1

An audit engagement letter

Accepted Answer

An audit engagement letter formalizes the relationship between the auditor and the client for a specific engagement. It outlines the scope of the audit, the responsibilities of both parties, and the expectations for the final report. While offering an auditor's services to a client is a common objective of an audit engagement letter, it's not the primary purpose. GAAS require auditors to communicate the terms of the engagement, but the letter is not a requirement in and of itself. The SEC may have specific expectations for audit firms, but these would be outlined in other documents, such as regulations or guidelines, rather than the engagement letter.

Question 2

The most relevant sources of civil liabilities for auditors failing to adhere to the requirements of the laws in carrying out professional obligations include all of the following except for:

Accepted Answer

Private Securities Litigation Reform Act of 1995 is not a source of civil liabilities for auditors.

Question 3

The Securities and Exchange Act of 1934

Accepted Answer

The Securities and Exchange Act of 1934 requires the filing of audited annual statements and reviewed quarterly statements to ensure transparency and accountability in financial reporting. The act does not limit the financial liability of independent auditors, regulate initial offering financial statements, or specify which services may be performed by an audit firm.

Question 4

All of the following proof can be used in an auditor's defense against third party lawsuits for fraud except for:

Accepted Answer

The answer of All of the following proof can be...

Question 5

When courts find accountants liable for constructive fraud, the implication is that

Accepted Answer

Constructive fraud is a legal concept that allows accountants to be held liable for fraud even if they did not have knowledge of deceit. This means that accountants can be responsible for fraudulent acts committed by others if they should have known about them, and did not take appropriate measures to uncover or prevent them. This holds true even if the fraud is committed by management and the accountant did not have a direct duty to third parties who are harmed by the fraud.

Question 6

The Ultramares v. Touche case of 1933 held that a cause of action based on negligence could not be maintained by a third party who was not in contractual privity; however, it did leave open the possibility that:

Accepted Answer

The Ultramares v. Touche case of 1933 held that a cause of action based on negligence could not be maintained by a third party who was not in contractual privity. However, it did leave open the possibility that third parties may sue in the case of fraud or constructive fraud. Therefore, option C is the best answer. Option A is incorrect as it does not align with the ruling of the case. Option B is also incorrect as it is not a valid exception in the Ultramares v. Touche case. Option D is not entirely accurate as the case did not grant third parties who used financial statements the right to sue.

Question 7

When an auditor acts so carelessly in the application of professional standards that it implies a reckless disregard for the standards of due care is referred to as

Accepted Answer

Constructive fraud refers to a situation where an auditor's actions are so careless that they imply a reckless disregard for the standards of due care, even if there was no intent to deceive.

Question 8

Under the Securities Act of 1933, if damages were incurred and there was a material misstatement or omission in the financial statements, the CPA will most likely lose the lawsuit unless

Accepted Answer

The answer of Under the Securities Act of 1933, if...

Question 9

The Rosenblum case ruling was of concern to the accounting profession because it implied that

Accepted Answer

The Rosenblum case ruling implied that all possible third party users of financial statements must be anticipated, which was a concern to the accounting profession as it would require greater care and attention to be given to the preparation of financial statements.

Question 10

A privity relationship means that

Accepted Answer

A privity relationship refers to a contractual relationship between parties. Therefore, the correct option is D - A party has a contractual obligation. Option A is incorrect because being a user of financial statements does not necessarily establish a privity relationship. Option B is incorrect because the ability to sue for fraud may depend on other factors, such as the jurisdiction's laws. Option C is incorrect because privity does not necessarily limit financial liability.

Question 11

The Restatement (Second) of Torts Approach

Accepted Answer

The Restatement (Second) of Torts approach expands an accountant's legal liability to third parties who are identified by the client as intended recipients of the accountant's work. This approach recognizes that accountants can be held liable to a broader group than just those with whom they have a direct contractual relationship (privity).

Question 12

Under the Securities Act of 1933 and the Securities and Exchange Act of 1934, accountants may be subject to criminal penalties for:

Accepted Answer

The answer of Under the Securities Act of 1933 and...

Question 13

The Securities Act of 1933

Accepted Answer

The Securities Act of 1933 regulates the initial offering of securities, aiming to ensure that investors have access to accurate and complete information regarding the securities being offered. This includes requiring companies to file registration statements and prospectuses with the SEC before offering securities to the public. The Act also prohibits fraud and misrepresentations in the sale of securities. The Act does not regulate the auditing of financial statements or limit the financial liability of independent auditors. However, the Sarbanes-Oxley Act of 2002 does regulate which services may be performed for a publicly-traded company by an audit firm.

Question 14

In the U.S., if the auditor can demonstrate having performed services with the same degree of skill and judgment possessed by others in the profession, it can be said to have exercised:

Accepted Answer

Due Care is the level of performance expected of auditors and is defined as the degree of skill and judgment possessed by others in the profession. Therefore, if the auditor can demonstrate having performed services with the same level of skill and judgment as others in the profession, it has exercised due care.

Question 15

The legal term for the intent to deceive, manipulate or defraud is

Accepted Answer

The legal term for the intent to deceive, manipulate, or defraud is scienter. The term refers to the knowledge or intent of wrongdoing, and it is often an important element in establishing liability in fraud or other intentional tort claims. Nonfeasance refers to a failure to act when there is a duty to do so, misfeasance refers to a wrongful or negligent act, and constructive fraud refers to a situation where a party acts in a way that creates a false impression or leads another to believe something that is not true, even if there is no intent to deceive.

Question 16

Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor?

Accepted Answer

Adherence to generally accepted auditing standards (GAAS) is considered a demonstration of due care because GAAS provides a framework for the audit process that, when followed, ensures the audit is conducted with the necessary professional competence and diligence.

Question 17

The Credit Alliance v. Arthur Andersen & Co. case established three tests that must be satisfied for holding auditors liable for negligence to third parties. All of the following are tests described except for

Accepted Answer

The three tests established in the Credit Alliance v. Arthur Andersen & Co. case are: 
1) Knowledge by the accountant that the financial statements are to be used for a particular purpose 
2) The intention of the third party to rely on those statements 
3) Some action by the accountant linking him or her to the third party that provides evidence of the accountant's understanding of intended reliance. The identity of the third party does not need to be directly known to the auditor, so option D is not one of the tests described.

Question 18

Whistleblowing as a result of a financial fraud may be appropriate under

Accepted Answer

The answer of Whistleblowing as a result of a financial...

Question 19

The executives of McKesson and Robbins Pharmaceuticals were able to steal about $2.9 million in 1939 because

Accepted Answer

The answer of The executives of McKesson and Robbins Pharmaceuticals...

Question 20

The legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future is referred to as:

Accepted Answer

Common law refers to the legal precedent created by judicial decisions and opinions. This is in contrast to statutory law, which is created by the legislative branch of government. Business law and tort law are specific areas of law, but do not describe the evolution of legal precedent.

Quiz 6: Legal, Regulatory, and Professional Obligations of Auditors