Deck 27: Accountants Duties and Liability

Question 1

Erin is a partner in the accounting firm of Adzem & Subtraxum, LLP, a limited liability partnership. The firm is being sued for negligence because of an audit in which she was not personally involved. If a huge verdict is entered against the firm, Erin could lose ________.

A) nothing
B) her capital contribution into the LLP
C) her capital contribution into the LLP, along with her personal assets
D) her personal assets, but not her capital contribution into the LLP

Answer 1

her capital contribution into the LLP

Question 2

Bill is a partner in the accounting firm of Adzem & Subtraxum, LLP, a limited liability partnership. Bill and the firm are being sued for negligence because of an audit in which he was the partner-in-charge. If the jury finds that Bill's negligence caused the damages to the plaintiffs and a huge verdict is entered, Bill could lose ________.

A) nothing
B) his capital contribution into the LLP
C) his capital contribution into the LLP, along with his personal assets
D) his personal assets, but not his capital contribution into the LLP

Answer 2

his capital contribution into the LLP, along with his personal assets

Question 3

Most companies located outside the United States follow the standards for prepararation and presentation of financial statements that are known as the

A) United Nations Principles for Accounting (UNPAs).
B) International Financial Reporting Standards (IFRSs).
C) World Bank Standards for Financial Statements (WBSFSs).
D) Principles of the European Union for Accounting (PEUAs).

Answer 3

International Financial Reporting Standards (IFRSs).

Question 4

International Financial Reporting Standards (IFRSs) are promulgated by ________.

A) the European Central Bank in Frankfurt, Germany
B) the International Chamber of Commerce in Paris, France
C) the United Nations Commission on International Trade Law in Vienna, Austria
D) the International Accounting Standards Board in London, England

Question 5

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

A) generally agrees that the company's financial records accurately represent the company's financial position, but notes a few departures from GAAPs
B) disagrees that the company's financial records accurately represent the company's financial position
C) cannot draw a conclusion about the accuracy of the company's financial records, generally due to a lack of sufficient information about the records
D) agrees that the company's financial records accurately represent the company's financial position

Question 6

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

A) fraud
B) negligence
C) criminal misconduct
D) racketeering

Question 7

Businessman Ernie Baydoff needs to file with the SEC a set of financial statements for his publicly traded company. The statements need to be certified by a CPA. The set of statements that Ernie wants to file show his company making a record profit; they are also completely bogus. To accomplish his goal, Ernie has been meeting with numerous small accounting firms and offering a big fee to any firms that would issue an unqualified opinion on the financial statements without conducting an audit or asking any questions. What Ernie is doing is known as ________.

A) "shopping" for accountants
B) racketeering
C) money laundering
D) capitalism

Question 8

What is meant by an "unqualified"audit opinion? Is this a good opinion?

Question 9

When would an auditor issue a "qualified"audit opinion?

Question 10

What does an adverse audit opinion mean? When would an auditor issue such an opinion? What are the implications of such an opinion?

Question 11

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

A) securities fraud
B) violation of Rule 10b-5
C) negligence
D) violating Section 11(a) of the Securities Act of 1933

Question 12

Maze engaged the firm of Hamilton & Burr to prepare a tax return that had to be filed with the state by the end of the month. Hamilton & Burr failed to prepare and file the return on time. As a result, Maze had to hire the firm of Adzem & Subtraxum to prepare and file the return, which was now late. As a result, Maze had to pay a fee to Adzem & Subtraxum, and pay the state the taxes that he owed, a late payment penalty, and post-due-date interest on the taxes he owed. In a subsequent lawsuit against Hamilton & Burr for breach of contract, Maze should be able to recover each of the following costs, EXCEPT:

A) the fee to Adzem & Subtraxum.
B) the taxes that he owed.
C) the late payment penalty.
D) the post-due-date interest on the taxes he owed.

Question 13

Violations of GAAPs or GAASs, or IFRSs, if applicable, are ________ evidence of negligence, although compliance does not automatically relieve the accountant of such liability.

A) prima facie
B) res ipsa loquitur
C) in rem
D) mens rea

Question 14

Accountants owe a duty to use ________ care, knowledge, skill, and judgment when providing auditing and other accounting services to a client.

A) minimal
B) a layperson's
C) expert
D) reasonable

Question 15

If an audit turns up a suspicious transaction or entry, the accountant ________.

A) must ignore it, due to the duty to client confidentiality
B) is under a duty to report it at once to the PCAOB
C) must investigate it and inform the client of the results of the investigation
D) is required to report it immediately to, and only to, the SEC

Question 16

Third parties ________ against an accountant for constructive fraud.

A) cannot bring a tort action
B) can bring a tort action
C) will frequently bring breach of contract actions
D) are barred from bringing a tort action

Question 17

Third parties ________ accountants for breach of contract.

A) frequently sue
B) are barred by federal law from suing
C) must defer to state attorneys general to sue
D) usually cannot sue

Question 18

In which of the following ways can an accountant avoid liability under Section 18(a) of the Securities Exchange Act of 1934?

A) if the accountant can show that the misleading statement was made to protect the company from Chapter 7 or Chapter 11 bankruptcy
B) if the accountant acted recklessly, rather than negligently
C) if the accountant had served as the plaintiff's employee within 180 days before the filing of the Section 18(a) action
D) if the accountant can show that the plaintiff had knowledge of the false statement when the securities were purchased or sold

Question 19

________ by an accountant is not a violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.

A) Actual fraud
B) Ordinary negligence
C) Intentional deceit
D) Reckless conduct

Question 20

The Private Securities Litigation Reform Act of 1995 replaced ________.

A) proportionate liability with joint and several liability
B) civil liability with criminal liability
C) criminal liability with civil liability
D) joint and several liability with proportionate liability

Question 21

Describe an auditor's duty to report a client's illegal activity.

Question 22

The SEC ________ an offending party for violations of Section 32(a) of the Securities Exchange Act of 1934.

A) has the independent power to criminally prosecute
B) can make a criminal referral to the U.S. Department of Justice, with a recommendation that they criminally prosecute
C) can make a criminal referral to a state attorney general, with a recommendation that he or she criminally prosecute
D) is limited to pursuing civil actions, and is thus barred from making criminal referrals for

Question 23

Persons injured by a RICO violation can ________.

A) only request that the violator be criminally prosecuted
B) bring a private civil action, but it is limited to injunctive relief
C) bring a private civil action against the violator and recover double damages
D) bring a private civil action against the violator and recover treble damages

Question 24

Registered accounting firms that audit more than 100 public companies annually are subject to inspection and review by ________ once a year.

A) the Financial Accounting Standard Board (FASB)
B) the Public Company Accounting Oversight Board (PCAOB)
C) the American Institute of Certified Public Accountants
D) the U.S. Department of Justice

Question 25

________ members of the Public Company Accounting Oversight Board (PCAOB) must be CPAs.

A) None of the
B) All
C) Two of the five
D) Five of the nine

Question 26

The Sarbanes-Oxley Act of 2002 requires that for each audit performed by a certified public accounting firm, the firm must assign at least two partners: a lead audit partner to supervise the audit and approve the audit report, and a ________.

A) reviewing partner to review and approve audit reports prepared by the firm
B) collecting partner to be in charge of collecting payments owed by the client
C) marketing partner to see what other services the firm can offer the client
D) public information partner to be the spokesperson for the firm for any media inquiries

Question 27

In accordance with the Sarbanes-Oxley Act of 2002, all audit papers must be retained by the auditing firm ________.

A) for at least 3 years
B) for at least 7 years
C) until the client changes auditors
D) forever

Question 28

The Sarbanes-Oxley Act of 2002 mandates that every public corporation must have an audit committee that is entirely composed of members of the board of directors who ________.

A) are also officer of the corporation
B) have been on the board the longest
C) are CPAs
D) are independent, i.e., not employed by the corporation and are only compensated for their directors' duties

Question 29

In accordance with the Sarbanes-Oxley Act of 2002, the audit committee must have at least one member who is ________.

A) a financial expert
B) a professor of Accounting
C) a lawyer
D) a retired auditor

Question 30

The U.S. Supreme Court ________ accountant-client privilege under federal law.

A) has ruled that there is no
B) has held that there is a limited
C) has recognized the application of a state
D) has mandated a wide-ranging

Question 31

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

A) allows for
B) recognizes the accountant-client privileges and bars
C) adopted the accountant work product privilege that prevents
D) expanded the attorney-client privilege to discourage the