Question 1

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 answer of Copper Piping Company's liabilities exceed its assets,...

Question 2

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

According to the Sarbanes-Oxley Act, registered public accounting firms are prohibited from providing certain non-audit services, such as bookkeeping, appraisal services, and financial systems design, to audit clients to ensure independence and objectivity during the audit process. Therefore, the only valid option in this scenario is none of the choices.

Question 3

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

Accepted Answer

Malpractice is commonly understood as professional negligence committed by a professional, such as a lawyer or a doctor, in the course of their work. Therefore, option D - professional negligence - is the most accurate choice here. Options A and B are incorrect because they refer to specific legal concepts that are not necessarily synonymous with malpractice. Option C is incorrect because there is a clear definition for malpractice.

Question 4

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...

Question 5

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

Accepted Answer

Defalcation is another term for embezzlement, which involves the misappropriation of funds by someone who was entrusted with them.

Question 6

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 with the intent to mislead Global Industries Inc. constitutes fraud. Global Industries justifiably relied on Farley's misstatement to its detriment, and as a result, Farley is liable for the fraud.

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

Under the Ultramares rule (also known as the privity rule), an accountant can only be held liable to those with whom they have privity of contract or "near privity" (meaning a relationship that is so close to a contractual relationship that it is fair to impose liability). Therefore, the accountant in this scenario could only be liable to Finance & Capital (with whom he has a direct contractual relationship) and not to any third party with whom he has no such relationship.

Question 8

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 9

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, Hill & Dale would be liable if they knew that the bank would rely on the balance sheet. This is known as the "known user" approach, which imposes a duty of care on accountants if they know or should have known that a specific user or limited group of users would rely on the financial statements. Therefore, Choice C is the correct answer.

Question 10

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 11

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 answer of Taylor is an accountant whose clients include...

Question 12

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 the client constitutes actual fraud. Actual fraud involves intentional misrepresentation or concealment of a material fact, made with knowledge of its falsity and with the intent to induce the other party's reliance, which causes injury or damage.

Question 13

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

Accepted Answer

Constructive fraud refers to negligence or breach of duty, rather than intentional fraud. Therefore, Drake can be held liable if he was grossly negligent in the performance of his duties as an accountant for Commerce Bank. Actual fraud, fraudulent intent, and impersonation are not necessary for constructive fraud.

Question 14

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

Dougal may be liable to both Felicia and Graham because under Section 11 of the Securities Act of 1933, anyone who is misled by a false or misleading omission in a registration statement can sue the preparer of that statement for damages. Both Felicia and Graham purchased the stock based on the registration statement that contained the statement with a material omission, so they both have grounds to bring a legal action against Dougal.

Question 15

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 and publishes the Model Rules of Professional Conduct, which are used as a guide for attorney ethical behavior in most states. No other listed organization has any authority or role in regulating attorney conduct.

Question 16

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

Delaney may successfully defend against the claim if he can show that the negligence was not the proximate cause of the client's losses. This means that the client's losses were not caused by Delaney's negligence, but rather by some other factor. If Delaney can prove this, then he may not be held liable for the client's losses. The other options (A, B, and D) are not relevant to whether Delaney can successfully defend against the claim of negligence.

Question 17

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 client's claim. It is the responsibility of an attorney to ensure that important deadlines are met in a case. Failing to do so can result in a malpractice claim.

Question 18

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 19

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

Accepted Answer

Violation of generally accepted accounting principles and generally accepted auditing standards is a clear indication of negligence on the part of an accountant. It is not only embarrassing but also subject to potential liability.

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 33: Liability of Accountants and Other Professionals

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​

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

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

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

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​

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

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​

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​

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​

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​

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

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​

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​

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

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​

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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