Question 1

Taylor is an accountant whose clients include Universal Metrics Corporation. Velma is Taylor's attorney. Working papers that Taylor develops when preparing financial reports for Universal Metrics are owned by

Accepted Answer

The working papers developed by an accountant, like Taylor, are typically owned by the accountant or their firm, not the client or the attorney.

Question 2

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

Accepted Answer

Farley's intentional misstatement of a material fact to mislead Global Industries, Inc. constitutes fraud. Fraud involves intentionally deceiving another party with the purpose of causing harm or obtaining an unfair advantage. In this case, Farley intentionally misled Global Industries, causing them harm, and therefore may be held liable for fraud.

Question 3

Lauren is an attorney. Like the conduct of all attorneys,Lauren's conduct is governed by rules of professional conduct established by the state in which she is licensed,and the Model Rules of Professional Conduct of

Accepted Answer

The American Bar Association establishes the Model Rules of Professional Conduct which govern the conduct of attorneys in the United States. None of the other options listed are responsible for setting the rules of professional conduct for attorneys.

Question 4

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 to mislead Fruit Packing, Inc. is an act of actual fraud, which involves a willful and intentional misrepresentation of a material fact with the intent to deceive and cause harm. The fact that Fruit Packing justifiably relied on the misstatement and suffered harm strengthens the case against Ezra for actual fraud. Constructive fraud typically involves a breach of duty that is based on negligence or recklessness, while destructive and virtual fraud are not recognized legal terms.

Question 5

Copper Piping Company's liabilities exceed its assets,but its books falsely reflect a positive net worth. Copper hires Dart & Dash,an accounting firm,to prepare a balance sheet,which is certified to show a net worth. Equity Bank relies on the balance sheet to make a loan to Copper. Copper defaults on the loan. Under the Ultramares rule,Dart & Dash is most likely not liable because the firm

Accepted Answer

The Ultramares rule limits the liability of accountants to third parties who are not in privity of contract with them. Dart & Dash is not liable to Equity Bank because there was no direct contractual relationship (privity) between them.

Question 6

Hadley,an accountant,accumulates working papers while performing an audit for Ilene. After the audit,these documents belong to

Accepted Answer

The answer of Hadley,an accountant,accumulates working papers while performing an...

Question 7

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

Accepted Answer

The Ultramares rule limits an accountant's liability to only those in privity or "near privity" (i.e. those with whom the accountant has a relationship so close as to approach that of privity). It does not extend liability to third parties who are not in privity or "near privity," such as Finance & Capital's clients or other third parties who may use the accountant's work.

Question 8

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

Accepted Answer

Edward can be held liable for malpractice for allowing the statute of limitations to lapse on a claim by his client, Fabrication Company. It is the duty of an attorney to advise clients of important deadlines and file necessary paperwork in a timely manner. By failing to do so, Edward breached his duty of care and could be held liable for any damages suffered by Fabrication Company as a result of the missed deadline.

Question 9

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

Accepted Answer

Section 11 of the Securities Act of 1933 imposes strict liability on anyone who prepares or certifies a registration statement containing a material misstatement or omission. Both Felicia and Graham are potential plaintiffs who could sue for damages. Therefore, Dougal may be liable to both of them.

Question 10

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

Accepted Answer

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

Question 11

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act,at the same time,for the same company,Root & Branch can also perform

Accepted Answer

As a registered public accounting firm performing auditing services under the Sarbanes-Oxley Act, Root & Branch is prohibited from performing bookkeeping, appraisal services, or financial systems design for the same company. This is to ensure independence and objectivity in the auditing process. Therefore, the only valid option is none of the choices.

Question 12

Gift Basket Company's liabilities exceed its assets. Gift Basket hires Hill & Dale,an accounting firm,to prepare a balance sheet. Through Hill & Dale's negligent omissions,the sheet shows a net worth. Investment Bank relies on the balance sheet to make a loan to Gift Basket. When Gift Basket defaults,the bank files a suit against Hill & Dale. Under the Restatement (Third)of Torts,Hill & Dale is most likely

Accepted Answer

Under the Restatement (Third) of Torts, an accountant may be liable to third parties if they knew that the third party would rely on their work, such as a balance sheet, and the third party suffers a loss due to the accountant's negligence.

Question 13

April is an accountant whose clients include Bistro Restaurants Inc. If April is negligent in her work for Bistro,most courts would hold her liable to Bistro and

Accepted Answer

The answer of April is an accountant whose clients include...

Question 14

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

Accepted Answer

Constructive fraud is a type of fraud that involves breach of fiduciary duty or breach of trust, without fraudulent intent. In this case, if Drake was grossly negligent in the performance of his duties, he could be held liable for constructive fraud. However, if Commerce Bank cannot prove that Drake acted with fraudulent intent, he cannot be held liable for actual fraud. The option of Drake impersonating someone who could be liable for fraud is not applicable in this context.

Question 15

Rollo is an accountant whose clients include Systems Analysis Corporation. Tyra is Rollo's attorney. Under the common law and by statute in many states,working papers that Rollo develops when preparing financial reports for Systems Analysis are owned by

Accepted Answer

The answer of Rollo is an accountant whose clients include...

Question 16

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 behavior that is considered inherently fraudulent, such as withholding information or making a material misrepresentation of fact, so intent to deceive does not need to be proven. However, Digital Systems Corporation must still prove misrepresentation of a material fact, justifiable reliance, and an injury to recover damages.

Question 17

Tyson accuses Ulman,an attorney,of committing malpractice. Malpractice is

Accepted Answer

Malpractice refers to professional negligence, which is the failure to exercise the level of care and skill that a reasonable professional in the same field would have exercised under similar circumstances.

Question 18

Delaney is an accountant charged with negligence by Estimation & Valuation Services Inc.,a client. Delaney may successfully defend against the claim if he can show that

Accepted Answer

In order for Delaney to successfully defend against the claim of negligence, he must prove that his negligence was not the proximate cause of the client's losses. This means that he must show that his actions did not directly lead to the client's damages. Simply showing that scienter was lacking or that he complied with all International Financial Reporting Standards may not be enough to absolve him of negligence. Contributory negligence, while a factor, may not be enough on its own to completely defend against the claim.

Question 19

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards

Accepted Answer

A violation of generally accepted accounting principles and generally accepted auditing standards is considered a breach of duty in the accounting profession and is therefore prima facie evidence of negligence. However, it must still be proven that the negligence caused harm to the client in order to establish liability.

Question 20

Nguyen Imports,Inc.,accuses Ogilvie,an accountant,of committing defalcation. This is

Accepted Answer

Defalcation typically refers to misappropriation or theft of funds, which is also known as embezzlement. Therefore, option A) is the best choice for this question.

Quiz 40: Liability of Accountants and Other Professionals