Question 1

An individual who is not party to the contract between a CPA and the client, but who is known by both and is intended to receive certain benefits from the contract is known as:

Accepted Answer

A third-party beneficiary is an individual who is not party to the contract but is intended to receive certain benefits from the contract. This can occur in situations where the client enters into a contract with a CPA to provide services for the benefit of a third party. In such cases, the third party can be considered a third-party beneficiary and may have legal rights to enforce the contract.

Question 2

Audit risk is the risk there will be an audit failure for a given audit engagement.

Accepted Answer

False

Question 3

The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the:

Accepted Answer

The standard of due care is generally defined as the care that a reasonably prudent person would exercise under similar circumstances. This is known as the prudent person concept, making choice A the correct answer. The other answer choices are not accurate descriptions of the standard of due care.

Question 4

The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called:

Accepted Answer

Separate and proportionate liability refers to the allocation of damages based on the degree of fault of each individual defendant. In other words, each defendant is only responsible for paying their share of the damages that they caused, rather than taking on the full amount of damages. This is different from joint and several liability, where each defendant is responsible for paying the full amount of damages, regardless of their individual level of fault. Shared liability is a more general term that could refer to either joint and several liability or separate and proportionate liability. Unitary liability is not a recognized legal term.

Question 5

Privity of contract exists between:

Accepted Answer

Privity of contract exists between the auditor and the client who has engaged the auditor to perform an audit. This means that only the auditor and the client have a direct contractual relationship, and the auditor's duty of care extends only to the client. The auditor does not have a direct contractual relationship with third parties and is therefore not liable to them. The auditor's relationship with the client attorney is also not a contractual one, but rather one of confidentiality and privilege.

Question 6

Auditors may be liable to their clients if they are found guilty of:

Accepted Answer

The answer of Auditors may be liable to their clients...

Question 7

Distinguish between what is meant by business failure and audit failure.

Accepted Answer

The answer of Distinguish between what is meant by business...

Question 8

Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users.This description is the legal term for:

Accepted Answer

Constructive fraud occurs when an auditor acts with reckless disregard for the truth, issuing an opinion without conducting an adequate audit, even without intent to deceive.

Question 9

Laws that have been passed by the U.S.Congress and other governmental units are:

Accepted Answer

Statutory laws are laws passed by a legislative body, such as the U.S. Congress, and are written down in code or statute form. These laws are also known as legislation or acts, and they can address a wide range of issues, such as criminal, civil, and administrative matters.

Question 10

The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called:

Accepted Answer

Joint and several liability refers to the legal principle where multiple defendants can be held collectively responsible for the full amount of damages suffered by the plaintiff, even if one defendant is more responsible than the others. This means that if one defendant cannot pay their share of the damages, the other defendants must make up the difference. It is also known as several liability with joint and several liability.

Question 11

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Accepted Answer

The term "audit failure" refers to the situation when the auditor did not follow auditing standards or did not perform sufficient procedures to detect material misstatements in the client's financial statements. If the auditor followed all the standards and procedures and still failed to detect the misstatements, it is referred to as an "Audit deficiency" rather than an "audit failure."

Question 12

In the performance of an audit, a CPA:

Accepted Answer

A CPA must exercise due professional care in the performance of their audit responsibilities to provide reasonable assurance that the financial statements are free from material misstatement. This includes obtaining sufficient appropriate audit evidence and following auditing standards, but it does not guarantee a perfect audit. The CPA is not legally liable for detecting every instance of fraud or error, but they are expected to design the audit to detect material misstatements, including fraud. GAAP must be followed for publicly held clients, but for privately held clients, the CPA must follow a suitable framework, which can include GAAP, but may also include other standards.

Question 13

The expectation gap:

Accepted Answer

The expectation gap refers to the difference between what the public and financial statement users believe auditors are responsible for and what auditors actually believe their responsibilities entail. This gap can lead to misunderstandings about the auditor's role, often resulting in unwarranted lawsuits when users' expectations are not met, even if the auditor has fulfilled their professional responsibilities.

Question 14

If an auditor fails to fulfill a certain requirement in the contract, they may be guilty of:

Accepted Answer

If an auditor fails to fulfill a certain requirement in the contract, they may be guilty of breach of contract, which means they have violated the terms of the agreement between the auditor and the client. It does not necessarily imply fraud or criminal intent, but it may result in legal and financial consequences for the auditor. Constructive fraud and criminal neglect are not applicable in this context.

Question 15

"Absence of reasonable care that can be expected of a person in a set of circumstances" defines:

Accepted Answer

The definition given describes ordinary negligence. Pecuniary negligence refers to negligence in financial matters, gross negligence involves reckless or willful disregard for safety, and extreme negligence is not a commonly recognized legal term.

Question 16

Fraud occurs when:

Accepted Answer

Fraud requires not only a misstatement, but also knowledge of its falsity and the intent to deceive. Option B is describing a type of misstatement known as an error. Options C and D are describing negligence, which does not necessarily involve a misstatement.

Question 17

Discuss three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.

Accepted Answer

The answer of Discuss three major factors that have contributed...

Question 18

An example of a breach of contract would likely include:

Accepted Answer

The answer of An example of a breach of contract...

Question 19

Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely.This would not include:

Accepted Answer

The liability under agency laws only extends to those individuals or entities on whom the CPA firm relies, and this does not typically include employees of the audit client. Therefore, partners of a CPA firm would not be liable for the work of employees of the audit client. A, C, and D may all be individuals or entities on whom the CPA firm relies for the audit, and therefore partners of the CPA firm may be liable for their work.

Question 20

A(n)________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards.

Accepted Answer

An audit failure occurs when an auditor issues an erroneous opinion because it failed to comply with the requirements of auditing standards. It is a failure in the auditing process.

Quiz 5: Legal Liability