Question 1

Class action lawsuits are designed to encourage multiple lawsuits arising from the same claim.

Accepted Answer

Class action lawsuits are designed to consolidate many similar claims into a single lawsuit to increase efficiency and reduce the burden on the court system.

Question 2

Under Common Law, liability concepts are developed through court decisions based on negligence, gross negligence, or fraud.

Accepted Answer

Common Law liability concepts are indeed developed through court decisions based on negligence, gross negligence, or fraud. This is because Common Law refers to the body of law that comes from judicial decisions, rather than statutes or written laws. As a result, liability concepts under Common Law are shaped by court decisions over time, and negligence, gross negligence, and fraud have all been recognized as possible grounds for liability.

Question 3

Negligence is the failure to exercise minimal care.

Accepted Answer

False

Question 4

Contingent fees are prohibited for any client for which the auditor performs audit services, but are otherwise permitted.

Accepted Answer

The answer of Contingent fees are prohibited for any client...

Question 5

Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the fees.

Accepted Answer

Accepting commissions or referral fees from or paying them to audit clients compromises the auditor's independence, which is a fundamental principle that must be maintained to ensure the integrity of the audit.

Question 6

In federal lawsuits, Congress has limited the extent of joint and several liability damages to the actual percentage of responsibility if auditors are found liable for less than 75% of damages.

Accepted Answer

The answer of In federal lawsuits, Congress has limited the...

Question 7

The confidentiality between auditor and client is legally equivalent as the confidentiality shared between attorney and client.

Accepted Answer

The confidentiality between auditor and client is not legally equivalent to attorney-client privilege, which is a stronger legal protection. Auditors may be required to disclose information to regulatory bodies or in legal proceedings.

Question 8

The Rules of Conduct govern the performance of CPAs in carrying out their public responsibilities.

Accepted Answer

The Rules of Conduct are a set of principles and standards that guide the behavior and performance of CPAs in carrying out their public responsibilities. These rules help to ensure that CPAs maintain integrity, objectivity, confidentiality, and professional competence in their work.

Question 9

A covered member's investment in a mutual fund which owns stock in a firm being audited by the covered member is a direct financial interest resulting in the impairment of independence.

Accepted Answer

A covered member's investment in a mutual fund is considered an indirect financial interest, not a direct one, unless the covered member has control over the mutual fund's investment decisions.

Question 10

The Principles of the AICPA Code of Professional Conduct provide a very detailed set of rules that represent a low level of actions.

Accepted Answer

The Principles of the AICPA Code of Professional Conduct provide a high level of ethical principles and values, rather than detailed rules and actions. The rules and actions are outlined in the various sections and interpretations of the Code.

Question 11

The AICPA's Code of Professional Conduct defines an indirect financial interest as an investment of one percent or less of a client's organization, and because the amount is so small it is considered immaterial

Accepted Answer

According to the AICPA's Code of Professional Conduct, an indirect financial interest is defined as an investment of more than one percent of a client's organization, and such an interest is considered material.

Question 12

The expectations gap related to shareholders' beliefs about recovery of losses on investments serves as a deterrent to lawsuits filed against audit firms.

Accepted Answer

The expectations gap refers to the difference between what the public thinks auditors are responsible for and what they are actually responsible for. One aspect of this gap is that shareholders may mistakenly believe that audit firms will compensate them for losses on their investments, when in reality, audit firms are not responsible for investment losses. This misunderstanding can make it more difficult for shareholders to successfully pursue lawsuits against audit firms, as it requires them to prove that the audit firm was negligent in performing their audit duties, rather than just showing that they suffered investment losses.

Question 13

Public confidence is mostly maintained by the public accounting profession through integrity based on personal moral standards and it is reinforced by codes of conduct.

Accepted Answer

The public accounting profession upholds public confidence through personal integrity based on moral standards, and this is further supported by codes of conduct.

Question 14

Gross negligence is a failure to use even minimal care or evidence of activities that show a recklessness or careless disregard for the truth.

Accepted Answer

Gross negligence is a level of negligence that goes beyond ordinary negligence, implying a severe lack of care or reckless disregard for the safety and well-being of others.

Question 15

Confidentiality is the cornerstone of the auditing profession.

Accepted Answer

The answer of Confidentiality is the cornerstone of the auditing...

Question 16

According to the framework for professional decision making, the first step in decision-making is to structure the audit problem

Accepted Answer

According to the framework for professional decision making, the first step is to structure the audit problem, followed by gathering information, evaluating evidence, considering alternatives, choosing an alternative, and then taking action.

Question 17

Contingent fees are prohibited for tax professionals when preparing tax returns for clients

Accepted Answer

Contingent fees are generally prohibited for tax professionals when preparing original or amended tax returns because the fee cannot depend on the outcome of the tax return. This is to ensure objectivity and integrity in the preparation of tax documents.

Question 18

Auditors are permitted to perform for a contingent fee an audit of the financial statements if the audit committee approves the agreement in advance of the services being provided.

Accepted Answer

Auditors are not permitted to perform for a contingent fee an audit of the financial statements even if the audit committee approves the agreement in advance of the services being provided. This is because a contingent fee creates a potential conflict of interest and undermines the auditor's independence, which is essential for the credibility of the financial statements.

Question 19

Liability concepts developed through court decisions are referred to as statutory law.

Accepted Answer

Liability concepts developed through court decisions are referred to as common law, while statutory law is made by legislative bodies.

Question 20

An individual does not need to agree to uphold the code of professional conduct in order to become licensed as a CPA.

Accepted Answer

In most jurisdictions, an individual must agree to uphold the code of professional conduct in order to become licensed as a CPA.

Quiz 4: Professional Liability, Auditor Judgment Frameworks, and Professional Responsibilities