Deck 51: Accountants' Duties and Liability

Question 1

The Financial Accounting Standards Board (FASB)issues new GAAP rules and amends existing ones.

Answer 1

True

Question 2

A probate can be defined as a verification of a company's books and records by a certified accountant.

Answer 2

False

Question 3

In the case of Ultramares Corporation vs.Touche,the defendant was found to be not guilty of negligence due to lack of privity of contract.

Answer 3

True

Question 4

An unqualified opinion would entail that the company's financial statements have some deviation from GAAPs.

Question 5

The Generally Accepted Auditing Standards (GAASs)are established by the American Institute of Certified Public Accountants.

Question 6

A formal entrance into a contract between a client and an accountant is called abatement.

Question 7

An adverse opinion is reflective of a material misstatement or discrepancy in a company's financial records.

Question 8

Constructive fraud is defined as intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damage.

Question 9

The legal theory that holds accountants liable to any member of a limited class of intended users for whose benefit the accountant has been employed is the Section 552 of the Restatement (Second)of Torts.

Question 10

A disclaimer of opinion is a clause in auditing that a company can claim wherein the auditor is not allowed to access a high-priority portion of a company's financial records.

Question 11

Violations of GAAPs or GAASs,or IFRSs,if applicable,are prima facie evidence of negligence in any court action.

Question 12

The Ultramares doctrine provides the broadest standard for holding accountants liable to third parties for negligence.

Question 13

Generally Accepted Accounting Principles (GAAPs)specify the methods and procedures that are to be used by public accountants when conducting external audits of company financial statements.

Question 14

Limited partners are personally liable for the debts and obligations of the LLP.

Question 15

Most accounting firms in the U.S.operate as limited liability partnerships (LLPs).

Question 16

An accountant's failure to follow the GAASs when conducting audits constitutes negligence.

Question 17

A person who practices as an accountant,but is not certified,is referred to as a public accountant.

Question 18

Accountants can be held liable for negligence in preparing unaudited financial statements.

Question 19

Pursuant to federal securities laws,an audit must be performed by a CPA who works closely with the company in the capacity of a chief executive officer (CEO)or a chief financial officer (CFO).

Question 20

A qualified opinion is the most favorable opinion that an accountant can render.

Question 21

Accountants can be named as defendants in lawsuits that assert violations of the Racketeer Influenced and Corrupt Organizations Act (RICO).

Question 22

Under the foreseeability standard,an accountant is liable even if he or she had no knowledge of the intended user of the audited financial statements.

Question 23

The Sarbanes-Oxley Act makes it lawful for an accounting firm to simultaneously provide audit and certain nonaudit services to a public company if the firm is registered.

Question 24

A private civil RICO based on securities fraud can only be brought once the defendant has been convicted for the crime.

Question 25

Registered accounting firms that audit more than 100 public companies annually are subject to inspection and review by the Public Company Accounting Oversight Board (PCAOB)once a year.

Question 26

The Tax Reform Act of 1976 created the Public Company Accounting Oversight Board (PCAOB).

Question 27

Federal law allows for discovery of an accountant's work papers in a federal case against the accountant's client.

Question 28

The Securities Act of 1933 requires that before a corporation or another business sells securities to the public,the issuer must file a registration statement with the Securities and Exchange Commission (SEC).

Question 29

Only purchasers and sellers of securities can sue under Section 10(b)and Rule 10b-5.

Question 30

The Private Securities Litigation Reform Act of 1995 replaced proportionate liability of the defendant with joint and several liability.

Question 31

All members of the Public Company Accounting Oversight Board (PCAOB)have to be CPAs.

Question 32

Accountants cannot be held criminally liable for material irregularities in financial statements prepared for registration statements.

Question 33

The SEC has the power to file criminal charges and award punishment for violations that come under Section 32(a)of the Securities Exchange Act of 1934.

Question 34

Ordinary negligence by an accountant is not a violation of Section 10(b)and Rule 10b-5.

Question 35

Third parties cannot sue accountants for breach of contract.

Question 36

If a state has passed the accountant-client privilege law,it implies that only an accountant can serve as a witness in a case against the client.

Question 37

A third party can bring a tort action against an accountant in case of constructive fraud.

Question 38

A due diligence defense cannot be asserted by an accountant against the civil liabilities of Section 11(a)of the Securities Act of 1933.

Question 39

The Securities Exchange Commission has oversight and enforcement authority over the Public Company Accounting Oversight Board.

Question 40

The Sarbanes-Oxley Act of 2002 prohibits the employment of an accountant by a previous audit client for five years after the first appointment.

Question 41

A(n)________ is defined as intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damage.

A)unqualified opinion
B)actual fraud
C)disclaimer of opinion
D)constructive fraud

Question 42

Which of the following is true of an auditor of a corporation?

A)The auditor must be an independent certified public accountant.
B)The auditor cannot use information about the corporation from third parties.
C)The auditor cannot inspect the corporation's real property unless he is closely associated with the company.
D)The auditor must provide a qualified opinion wherever possible since it helps the company in business.

Question 43

Which of the following is the most common type of corporate structure that is used by accounting firms that operate in the U.S.?

A)as a limited liability partnership
B)as a corporation
C)as a cooperative
D)as sole traders

Question 44

A(n)________ is an auditor's opinion that states that the financial statements are fairly represented except for,or subject to,a departure from GAAPs,a change in accounting principles,or a material uncertainty.

A)unqualified opinion
B)qualified opinion
C)adverse opinion
D)disclaimer of opinion

Question 45

________ specify the methods and procedures that are to be used by public accountants when conducting external audits of company financial statements

A)Generally accepted accounting principles
B)Generally accepted auditing standards
C)Auditor's expert opinions
D)General engagements and agreements

Question 46

Which of the following legislations can a state adopt in determining whether an accountant is liable in negligence to third parties?

A)Section 2(b)of the Robinson-Patman Act
B)Section 5 of the Federal Trade Commission
C)Section 552 of the Restatement (Second)of Torts
D)Section 16 of the Clayton Act

Question 47

Which of the following opinions would an auditor make for a company that,he or she feels,has materially misstated certain items on its financial statements?

A)an unqualified opinion
B)an adverse opinion
C)a qualified opinion
D)a disclaimer of opinion

Question 48

Standards for the preparation and presentation of financial statements are known as ________.

A)engagements and agreements
B)auditor's opinions
C)generally accepted accounting principles
D)generally accepted auditing standards

Question 49

Which of the following statements is true of the GAAP?

A)It is used by auditors as a guide for their nonaudit services only.
B)It is the accepted form of accounting principles around the world.
C)It cannot be modified once established by the American Institute of Certified Public Accountants.
D)It sets rules for how corporations must set their accounts on their financial statements.

Question 50

Which of the following statements is true with regard to accountants?

A)Accountants cannot be hired to perform nonaudit services.
B)Accountants cannot be held liable by provisions of common law.
C)Accountants can be held liable to clients but not to third parties.
D)Accountants who lack CPA certification are called public accountants.

Question 51

Which one of the following is the most favorable opinion an auditor can give a company following an audit?

A)an unqualified opinion
B)a disclaimer of opinion
C)an adverse opinion
D)a qualified opinion

Question 52

An auditor's opinion that the company's financial statements fairly represent the company's financial position,the results of its operations,and the change in cash flows for the period under audit,in conformity with generally accepted accounting principles is referred to as a(n)________.

A)disclaimer of opinion
B)adverse opinion
C)qualified opinion
D)unqualified opinion

Question 53

Which of the following opinions is necessary for a company to avoid unfavorable repercussions on the company?

A)an adverse opinion
B)a qualified opinion
C)a disclaimer of opinion
D)an unqualified opinion

Question 54

A rule that says that an accountant is liable for negligence to third parties who are projected users of the client's financial statements is known as ________.

A)the foreseeability standard
B)the Ultramares doctrine
C)the due diligence defense
D)the privity of contract

Question 55

If an auditor makes a disclaimer of opinion,this means that the auditor is ________.

A)favorable to the company's financial statement matching its performance but notes a few departures from GAAPs
B)unfavorable about the financial statement representing the company's position
C)unable to draw a conclusion about the accuracy of the company's financial records owing to lack of information
D)favorable of the company's financial statements representing its performance

Question 56

Which of the following rules provides that an accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client's financial statements?

A)Section 552 of the Restatement (Second)of Torts
B)the foreseeability standard
C)the Ultramares doctrine
D)due diligence defense

Question 57

Holly Lane is an accountant with Mildred & Lane Co.and she has recently been asked to visit Maine Manufacturers to survey their financial records,assess their compliance with federal and state laws,and provide an opinion reflecting the state of the company's financial records.Holly's assessment of the financial records of Maine Manufacturers is called a(n)________.

A)probate
B)audit
C)arraignment
D)easement

Question 58

A formal entrance into a contract between a client and an accountant is known as a(n)________.

A)abatement
B)arraignment
C)easement
D)engagement

Question 59

The ________ is a rule that says that an accountant is liable only for negligence to third parties who are in privity of contract or in a privity-like relationship with the accountant.

A)foreseeability standard
B)Ultramares doctrine
C)due diligence defense
D)disclaimer of opinion

Question 60

A verification of a company's books and records pursuant to federal securities laws,state laws,and stock exchange rules that must be performed by an independent CPA is known as a(n)________.

A)probate
B)ademption
C)audit
D)deposition

Question 61

Which of the following is a necessity to bring a private civil action against a violator of RICO based on securities fraud?

A)The accountant must not be a third-party independent contractor.
B)The defendant has to be first criminally convicted in connection with the securities fraud.
C)The plaintiff should file the case before the government brings a lawsuit.
D)The defendant has to be tried by the application of the Section 32(a)of the Securities Exchange Act of 1934 first.

Question 62

Which of the following is true of Section 10A of the Securities Exchange Act of 1934?

A)It prohibits any manipulative or deceptive practice in connection with the process of the probate.
B)It serves as a defense an accountant can assert by claiming due diligence to avoid civil liability.
C)It enforces a duty on auditors to detect and report illegal acts committed by their clients.
D)It imposes a criminal liability on accountants for making misstatements or omissions in nonaudit services.

Question 63

________ is a state law that provides that an accountant's work papers cannot be used against a client in a court action.

A)Work product immunity
B)Accountant-client privilege
C)Foreseeability standard
D)Noerr Doctrine

Question 64

Which of the following can be used by an accountant to counter liability imposed under Section 11(a)of the Securities Act of 1933?

A)the nolo contendere rule
B)the due diligence defense
C)the Ultramares doctrine
D)the foreseeability standard

Question 65

Which of the following is true of the Public Company Accounting Oversight Board?

A)All members of the Public Company Accounting Oversight Board have to be CPAs.
B)The Public Company Accounting Oversight Board was created by the Tax Reform Act of 1976.
C)The SEC has oversight and enforcement authority over the board and its functioning.
D)The Public Company Accounting Oversight Board lacks the power to initiate any disciplinary actions against defaulting accountants.

Question 66

Explain Section 552 of the Restatement (Second)of Torts.

Question 67

When does an auditor submit a disclaimer of opinion? What is the significance of an auditor's opinion?

Question 68

In which of the following ways can an accountant defeat the imposition of liability under Section 18(a)?

A)if he or she can show that the misleading statement was made to protect the company from bankruptcy
B)if he or she had acted out of recklessness
C)if he or she was an employee to the plaintiff
D)if he or she can show that the plaintiff had knowledge of the false statement

Question 69

Which of the following provides the broadest standard for holding accountants liable to third parties for negligence?

A)due diligence defense
B)the foreseeability standard
C)the Ultramares doctrine
D)nolo contendere

Question 70

________ is a rule that limits a defendant's accountability to his or her equivalent degree of fault.

A)Privity of contract
B)Due diligence defense
C)Proportionate liability
D)Ultramares doctrine

Question 71

The ________ Act of 1976 specifically imposes penalties and fines for the willful understatement of a client's tax liability.

A)Tax Reform
B)Racketeer Influenced and Corrupt Organizations
C)Private Taxation Litigation Reform
D)Uniform Securities

Question 72

________ imposes civil liability on accountants and others for making misstatements or omissions of material facts in a registration statement,or failing to find such misstatements or omissions.

A)Section 11(a)of the Securities Act of 1933
B)Section 10A of the Securities Exchange Act of 1934
C)Section 101 of the Uniform Securities Act
D)Section 18(a)of the Securities Exchange Act of 1934

Question 73

Which of the following legislations provides for both civil and criminal penalties,including up to recovering treble damages,for securities fraud by accountants?

A)Private Securities Litigation Reform Act of 1995
B)Section 32(a)of the Securities Exchange Act of 1934
C)Tax Reform Act of 1976
D)Racketeer Influenced and Corrupt Organizations Act

Question 74

Which of the following legislations makes it a criminal offense to willfully make any untrue statement of material fact in a registration statement filed with the SEC?

A)Section 24 of the Securities Act of 1933
B)Tax Reform Act of 1976
C)Private Securities Litigation Reform Act of 1995
D)Section 10(b)of the Securities Exchange Act of 1934

Question 75

Under the Sarbanes-Oxley Act,in order to audit a public company,________.

A)only public accountants must constitute the audit committee
B)a public accounting firm must register with the PCAOB
C)all public accounting firms must assign an accountant who works closely with one client over a long duration of time
D)the law of accountant-client privilege must be accepted by the state legislative mechanism

Question 76

________ is a law that prohibits any manipulative or deceptive practice in connection with the purchase or sale of a security.

A)Section 11(a)of the Securities Act of 1933
B)Section 32(a)of the Securities Exchange Act of 1934
C)Section 10(b)of the Securities Exchange Act of 1934
D)Section 101 of the Uniform Securities Act

Question 77

Why do accountants come under the purview of Section 18(a)of the Securities Exchange Act of 1934?

A)because they often file reports and other documents with the SEC on behalf of clients
B)because CPAs are directly employed by the SEC
C)because all companies require an accountant's approval before buying securities from the SEC
D)because securities can only be bought through a CPA

Question 78

Which of the following is true of Rule 10b-5?

A)Privity of contract is a necessity for bringing a lawsuit under this rule.
B)Civil private lawsuits are not permitted under this rule.
C)Only purchasers and sellers of securities can sue under this rule.
D)Ordinary negligence is a violation of this rule.

Question 79

When an accountant has behaved negligently causing damage to a third party,the third party ________.

A)can claim privity of contract with the defendant
B)cannot bring a tort action against the accountant to recover damages
C)cannot sue accountants for breach of contract
D)cannot claim constructive but not actual fraud on part of the defendant

Question 80

The accountant-client privilege is a law that entails that ________.

A)only an accountant can serve as a witness for the client in a court action
B)an accountant's paperwork be taken as prima facie evidence against a client in a court action
C)an accountant cannot be called as a witness against a client in a court action
D)an accountant does not enjoy work product immunity when a client is accused of gross negligence