Question 1

Gen & Hetty is a Registered Public Accounting Firm. The firm performs auditing services for Healthcare Company. Under the Sarbanes-Oxley Act, at the same time, for the same company, Gen & Hetty can also perform

Accepted Answer

Under the Sarbanes-Oxley Act, a public accounting firm is prohibited from performing certain non-audit services, including bookkeeping, appraisal services, and financial systems design, for the same company it is auditing. Therefore, the only valid choice is B) none of the choices.

Question 2

Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove

Accepted Answer

Constructive fraud is based on negligence rather than intent to deceive, so Digital Systems need not prove intent to deceive. However, they would still need to prove misstatement of a material fact, justifiable reliance, and an injury in order to succeed in the suit. Therefore, the correct answer is B.

Question 3

Beth is an accountant whose clients include Concessions Inc. If Beth is negligent in her work for Concessions, most courts would hold her liable to the client and

Accepted Answer

Most courts follow the "foreseen user" rule, which holds accountants liable to third parties who are intended or foreseen users of the accountant's work.

Question 4

An attorney's conduct is governed by rules of professional conduct established by the state in which he or she is licensed, and the Model Rules of Professional Conduct of

Accepted Answer

The American Bar Association (ABA) is the governing organization that establishes the Model Rules of Professional Conduct, which serves as a blueprint for most states' rules of professional conduct.

Question 5

Haji is an accountant charged with negligence by Infrastructure Service Inc., a client. Haji may successfully defend against the claim if he can show

Accepted Answer

The only way for Haji to successfully defend against the claim is by proving that he was not negligent in his work. The other choices do not necessarily absolve him of negligence.

Question 6

Ben is an accountant whose clients include Capital Inc. Under the Ultramares rule, if Ben is negligent in his work for Capital, he could be liable to the client and

Accepted Answer

The Ultramares rule limits an accountant's liability to only those with whom the accountant is in privity or "near privity" (meaning a third party who the accountant knows will rely on the accountant's work). This means that option A, C, and D are incorrect as they all include liability for third parties who are not in privity or near privity with the accountant.

Question 7

Enya is an attorney whose clients include Finance Company. If Enya is negligent in her work for Finance, under the Restatement (Third) of Torts, she may be liable to the client and

Accepted Answer

The answer of Enya is an attorney whose clients include...

Question 8

Norm is an accountant. With respect to an allegation of negligence by Online Retail Inc., one of Norm's clients, Norm's violation of generally accepted accounting principles and generally accepted auditing standards

Accepted Answer

Violation of generally accepted accounting principles and generally accepted auditing standards is evidence of negligence, which creates a presumption that the accountant failed to meet the standard of care. This is known as prima facie evidence. The burden then shifts to the accountant to rebut the presumption of negligence.

Question 9

Carbon Company's liabilities exceed its assets. The firm hires Dobie, an accountant, to certify a balance sheet showing a positive net worth. Equity Bank relies on the balance sheet to make a loan to Carbon. The firm defaults. Under the Ultramares rule, Dobie is most likely not liable because he

Accepted Answer

Under the Ultramares rule, an accountant (like Dobie) is typically not held liable to third parties (such as Equity Bank) for negligence in preparing financial statements unless there is privity of contract, meaning a direct contractual relationship between the parties. Since Dobie was hired by Carbon Company and not directly by Equity Bank, there is no privity of contract between Dobie and the bank.

Question 10

Frye, an accountant, intentionally misstates a material fact to mislead Global Industries Inc., a client. Global justifiably relies on the misstatement to its detriment. Frye is most likely liable for

Accepted Answer

Frye intentionally made a misstatement to deceive the client, which constitutes fraud. The client justifiably relied on the misstatement to its detriment, making Frye liable for fraud.

Question 11

Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable

Accepted Answer

Constructive fraud occurs when there is a breach of duty and a resulting injury or loss to the plaintiff, even if there was no intent to deceive. Drake may be held liable if he was grossly negligent in the performance of his duties as an accountant for Commerce Bank. Actual intent to deceive is not required for liability in constructive fraud.

Question 12

Lou, an attorney, allows a statute of limitations to lapse on a claim by Metal Fabrication Company, a client. Lou

Accepted Answer

Lou can be held liable for malpractice because he failed to exercise reasonable care and diligence in representing his client by allowing the statute of limitations to lapse. This failure to meet the standard of care can result in a malpractice claim against the attorney.

Question 13

Regarding a professional, malpractice is

Accepted Answer

Malpractice refers to professional negligence, which is a failure to provide a reasonable level of care, leading to harm or injury to the client or patient. Choices A, B, and C are not relevant to malpractice.

Question 14

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

Accepted Answer

Intentionally misstating a material fact to mislead a client is a classic example of actual fraud, also known as fraud in the inducement. The client justifiably relies on the misstatement to its detriment, meaning that there has been a clear harm caused by Ezra's actions. The other options given (constructive fraud, destructive fraud, and virtual fraud) are not commonly used terms in the field of fraud law.

Question 15

Galen prepares a financial statement for Hobby Inc. before a public offering of its stock. The Securities and Exchange Commission orders a revision of the statement. During the subsequent delay of the offering, the stock price drops. Hobby files a suit against Galen for negligence. Galen's best defense is

Accepted Answer

Galen's best defense would be that even if he was negligent in the preparation of the financial statement, it was not the proximate cause of the drop in the stock price. This means that there were other factors that contributed to the drop in the stock price, and Galen's negligence was not the primary cause.

Question 16

Hoki, an accountant, accumulates working papers while performing an audit for Insurance Corporation. After the audit, these documents belong to

Accepted Answer

The working papers accumulated by an accountant during an audit are considered the property of the accountant. However, the client, in this case, the Insurance Corporation, has the right to access these papers. This is because the working papers are prepared by the accountant in the course of the audit service provided to the client, but they are part of the accountant's work product.

Question 17

Ty is an accountant whose clients include United Corporation. Working papers that Ty develops when preparing financial reports for United are owned by

Accepted Answer

Working papers developed by an accountant in the preparation of financial reports for a client are considered the property of the accountant. These documents are part of the accountant's work product and are used to support the accountant's findings and opinions.

Question 18

Rico, an accountant, contracts to conduct an audit for Sushi Restaurants. In performing the audit, Rico fails to detect a Sushi employee's obvious theft of funds from the firm. Rico is most likely

Accepted Answer

Rico would be liable if a normal audit, conducted with due diligence and according to standard auditing practices, would have revealed the theft. Audits are designed to review financial records and practices to ensure accuracy and detect fraud or theft, so failing to detect obvious theft indicates a failure in performing the audit properly.

Question 19

Del, an accountant, prepares for Econo Inc., a financial statement that omits a material fact. The statement is included in Econo's registration statement filed with the Securities and Exchange Commission. Fran, who relies on the statement, and Gib, who does not, each buy Econo stock. Under Section 11 of the Securities Act of 1933, Del may be liable to

Accepted Answer

Under Section 11 of the Securities Act of 1933, anyone who buys stock based on a misleading statement or omission in a registration statement may sue for damages. Even though Gib did not rely on the statement, he is still entitled to sue as a purchaser of the stock. Therefore, Del may be liable to both Fran and Gib.

Question 20

Auto Company's liabilities exceed its assets. The firm hires Bass, an accountant, to prepare a balance sheet. Through negligent omissions, the sheet shows a net worth. Credit Bank relies on the document to make a loan to Auto. When the firm defaults, the bank files a suit against Bass. Under the Restatement (Third) of Torts, Bass is most likely

Accepted Answer

Under the Restatement (Third) of Torts, an accountant can be liable to third parties if they knew that the third party would rely on the financial statements.

Quiz 40: Liability of Accountants and Other Professionals