Question 1

An accountant who does not comply with GAASs when conducting an audit and thereby fails to uncover a fraud or embezzlement by an employee of the company being audited can be sued for damages arising from this negligence.

Accepted Answer

This is true as accountants are held to a certain standard when conducting audits, and failure to comply with GAASs can result in negligence that leads to damages for the company and its stakeholders.

Question 2

Where an accountant has been found liable for actual or constructive fraud,the client may bring a criminal lawsuit and recover any damages proximately caused by that fraud.

Accepted Answer

A client may bring a civil lawsuit to recover damages for fraud, but criminal lawsuits are typically pursued by the state or government, not individuals.

Question 3

Punitive damages are not recoverable in cases of actual fraud.

Accepted Answer

Punitive damages may be recoverable in cases of actual fraud if the defendant's conduct was particularly egregious or malicious.

Question 4

The terms of an "engagement" are specified when an accountant and a client enter into a contract.

Accepted Answer

The terms of an engagement, including services to be provided, expectations, and fees, are typically specified in a contract between an accountant and their client.

Question 5

Accountants cannot be held liable for their negligence in preparing unaudited financial statements.

Accepted Answer

Accountants can be held liable for their negligence in preparing unaudited financial statements, especially if their negligence leads to financial harm to the recipient of the statements. However, the level of liability may be lower compared to audited financial statements, as unaudited statements do not undergo the same level of scrutiny and verification.

Question 6

In terms of an accountant's liability for breach of a contract with a client,courts generally consider damages to be the expenses the client incurs in securing another accountant to perform the needed services,as well as any fines or penalties incurred by the client for missed deadlines and lost opportunities.

Accepted Answer

This is generally true as damages for breach of contract with a client typically include the expenses incurred by the client in finding a new accountant, as well as any penalties or missed opportunities resulting from the breach. However, the specific damages awarded may vary depending on the details of the case and the jurisdiction where it is heard.

Question 7

Constructive fraud is sometimes categorized as gross negligence.

Accepted Answer

Constructive fraud is a type of fraud where one party breaches their legal or fiduciary duty, even if they did not intend to deceive or harm the other party. It is categorized as gross negligence because it involves a failure to exercise reasonable care, which is a characteristic of gross negligence.

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 damages.

Accepted Answer

Constructive fraud does not require intent; it involves a breach of duty that results in misleading another party, even if there was no intent to deceive.

Question 9

Compliance with GAAPs and GAASs automatically relieve accountants of negligence liability.

Accepted Answer

Compliance with GAAPs and GAASs does not automatically relieve accountants of negligence liability. While GAAPs and GAASs provide guidelines and standards for accounting practices, accountants can still be held liable for any negligence or errors in their work. Compliance with these standards can be used as evidence of due care, but it does not automatically absolve an accountant of any negligence.

Question 10

If an audit turns up a suspicious transaction or entry,the accountant is under a duty to investigate it and to inform the client of the results of the investigation.

Accepted Answer

As a professional obligation, an accountant must investigate any suspicious transaction found in an audit and inform the client of the investigation's results. This is necessary to ensure the integrity of financial information and prevent fraudulent activities. Failing to perform this duty could result in legal and professional consequences for the accountant.

Question 11

Actual fraud occurs when an accountant acts with "reckless disregard" for the truth or the consequences of his or her actions.

Accepted Answer

The answer of Actual fraud occurs when an accountant acts...

Question 12

When an accountant performs his or her services with reckless disregard for the truth,or with reckless disregard for the consequences of his or her actions,the accountant is guilty of actual fraud.

Accepted Answer

Reckless disregard for the truth or consequences is typically considered constructive fraud, not actual fraud, which involves intentional deceit.

Question 13

The landmark case that initially defined the liability of accountants to third parties was Supramares Corporation v.Goldman Sachs.

Accepted Answer

The landmark case that initially defined the liability of accountants to third parties was Ultramares Corporation v. Touche in 1931, not Supramares Corporation v. Goldman Sachs.

Question 14

The Ultramares doctrine is the majority rule for accountants' liability for negligence in the United States.

Accepted Answer

The Ultramares doctrine, which limits accountants' liability for negligence to only those in privity of contract or intended third-party beneficiaries, is the majority rule in the United States.

Question 15

There are three (3)major rule of liability that a state can adopt in determining whether an accountant is liable in negligence to third parties: (1)the Supramares doctrine; (2)Section 552 of the Restatement (Second)of Torts; and (3)the reasonableness standard.

Accepted Answer

The three major rules of liability are the Ultramares doctrine, Section 552 of the Restatement (Second) of Torts, and the foreseeability standard, not the reasonableness standard.

Question 16

Either privity of contract or a privity-like relationship is required to hold an accountant liable for negligence to a third party under the "foreseeability" rule.

Accepted Answer

The "foreseeability" rule allows for liability to third parties even without privity or a privity-like relationship, as long as the harm was foreseeable.

Question 17

In a limited liability partnership,a limited partner whose negligent or intentional conduct causes injury is not personally liable for his or her own conduct.

Accepted Answer

A limited partner in a limited liability partnership is personally liable for their own negligent or intentional conduct that causes injury.

Question 18

In Ultramares Corporation v.Touche,the United States Supreme Court held that an accountant cannot be held liable for negligence unless the plaintiff was either in privity of contract or a privity-like relationship with the accountant.

Accepted Answer

The statement accurately reflects the holding in Ultramares Corporation v. Touche. The case established the privity doctrine, which limits the scope of an accountant's liability for negligence to those in privity of contract or a relationship that approximates privity.

Question 19

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

Accepted Answer

Limited partners are not personally liable for the debts and obligations of the LLP. They have limited liability, which means their liability is limited to the amount of their investment in the partnership.

Question 20

A violation of generally accepted accounting principles or generally accepted auditing standards is prima facie evidence of negligence.

Accepted Answer

A violation of GAAP or GAAS is considered prima facie evidence of negligence because these standards represent the minimum level of competence and care expected in the accounting and auditing professions.

Quiz 40: Accountants' Liability