Question 1

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 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

Del may be liable to Fran and Gib because the financial statement omitted a material fact and was included in Econo's registration statement filed with the Securities and Exchange Commission.

Question 2

Regarding a professional, malpractice is

Accepted Answer

Malpractice refers to negligence or failure on the part of a professional to perform their duties to the required standard of care, leading to harm or damage.

Question 3

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 4

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

Accepted Answer

C) Third parties who are foreseen users of the work are typically the ones to whom accountants like Bee can be held liable, as these parties are intended to rely on the accountant's work.

Question 5

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

Violating generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) is considered prima facie evidence of negligence. This means that if it is proven that Norm violated these standards, it is presumed that he was negligent unless he can provide evidence to the contrary.

Question 6

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

Ezra's intentional misstatement of a material fact to mislead Fruit Packing Inc., which then justifiably relies on this misstatement to its detriment, constitutes actual fraud. Actual fraud involves intentional deception to secure unfair or unlawful gain.

Question 7

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 for negligence to parties in privity or near privity, meaning the accountant is not liable to third parties with whom there is no direct relationship.

Question 8

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's intentional misstatement of a material fact to mislead a client, which the client justifiably relied on to its detriment, constitutes fraud. Fraud involves intentional deception to secure unfair or unlawful gain.

Question 9

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

Accepted Answer

Allowing a statute of limitations to lapse on a client's claim can constitute legal malpractice if it results in harm to the client's interests. This is because attorneys are expected to manage and pursue their clients' cases diligently, including adhering to relevant deadlines.

Question 10

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.

Question 11

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 Registered Public Accounting Firm is prohibited from providing certain non-audit services, including bookkeeping, appraisal services, and financial systems design, to an audit client to ensure independence and avoid conflicts of interest.

Question 12

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 Model Rules of Professional Conduct, which serve as a guideline for attorneys in the United States, are established by the American Bar Association (ABA). These rules set forth the standards of legal ethics and professional responsibility for lawyers in the U.S.

Question 13

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

A) Galen's best defense is that even if there was negligence, it was not the proximate cause of the stock price drop. This implies that other factors could have influenced the stock price, not necessarily the delay caused by the revision of the financial statement.

Question 14

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

Accepted Answer

Constructive fraud does not require proof of fraudulent intent but can be based on a breach of duty leading to an unfair advantage, such as gross negligence in the performance of duties.

Question 15

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 16

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 17

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 18

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

Haji can successfully defend against the negligence claim by proving that he was not negligent in his duties as an accountant.

Question 19

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 20

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

Accepted Answer

In a case of constructive fraud, the plaintiff (Digital Systems Corporation, in this case) does not need to prove that the defendant (Ethan) had an intent to deceive. Constructive fraud can be found based on a breach of duty or an act that deceives another to their detriment, without the necessity of proving malicious intent.

Quiz 42: Professional Liability and Accountability