Question 1

Taylor is an accountant whose clients include Universal Metrics Corporation. Vera is Taylor's attorney. Working papers that Taylor develops when preparing financial reports for Universal Metrics are owned by​
A) ​Taylor.
B) ​Universal.
C) ​Vera.
D) ​no one-the papers must be destroyed immediately after use.

Accepted Answer

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

Question 2

Commerce Bank files a suit against Drake, its former accountant, alleging constructive fraud. Drake may be held liable​
A) ​if Commerce Bank cannot prove actual fraud.
B) ​if Drake was grossly negligent in the performance of his duties.
C) ​only if Drake acted with fraudulent intent.
D) ​only if Drake impersonated someone who could be liable for fraud.

Accepted Answer

Constructive fraud means that while there may not have been an intention to deceive, actions taken by the defendant were so reckless that they amount to fraud. Gross negligence is a higher standard of negligence than ordinary negligence and may be considered reckless behavior. Therefore, Drake may be held liable if Commerce Bank can prove that he was grossly negligent in the performance of his duties. Actual fraud requires proof of intent to deceive or defraud, which is not necessary for constructive fraud. Impersonating someone who could be liable for fraud is not relevant to constructive fraud.

Question 3

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​
A) ​any third party.
B) ​no third party.
C) ​third parties who are foreseen users of the work.
D) ​third parties who are reasonably foreseeable users of the work.

Accepted Answer

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

Question 4

Hadley, an accountant, accumulates working papers while performing an audit for Ilene. After the audit, these documents belong to​
A) ​Hadley, with Ilene having a right of access to the papers.
B) ​Ilene, with Hadley having a right of access to the papers.
C) ​neither Hadley nor Ilene-the papers must be disposed of.
D) ​the Public Company Accounting Oversight Board.

Accepted Answer

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

Question 5

Digital Systems Corporation files a suit against Ethan, its former accountant, alleging constructive fraud. Digital Systems need not prove​
A) ​misstatement of a material fact.
B) ​intent to deceive.
C) ​justifiable reliance.
D) ​an injury.

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.

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​
A) ​fraud.
B) ​malpractice.
C) ​negligence.
D) ​none of the choices.

Accepted Answer

Farley's intentional misstatement to mislead the client constitutes an act of fraud, which is a deliberate deception intended to secure an unfair or unlawful gain or to deprive a victim of a legal right. Global Industries, Inc. relied on the misstatement to its detriment, which makes Farley liable for fraud. Malpractice refers to professional negligence or misconduct, which is not applicable in this scenario. Negligence involves the breach of a duty of care owed to another person, resulting in foreseeable harm, which is also not applicable in this scenario.

Question 7

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​
A) ​the Securities and Exchange Commission.
B) ​the American Bar Association.
C) ​the American Institute of Certified Public Accountants.
D) ​the International Accounting Standards Board.

Accepted Answer

The Model Rules of Professional Conduct are established by the American Bar Association and serve as a model for state rules of professional conduct for attorneys. The Securities and Exchange Commission, the American Institute of Certified Public Accountants, and the International Accounting Standards Board do not establish rules of professional conduct for attorneys.

Question 8

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is​
A) ​embezzlement.
B) ​general misconduct.
C) ​professional negligence.
D) ​misrepresentation of professional expertise.

Accepted Answer

Defalcation is another term for embezzlement, which involves the fraudulent appropriation of money or property that is entrusted to someone's care.

Question 9

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​
A) ​bookkeeping.
B) ​none of the choices.
C) ​appraisal services.
D) ​financial systems design.

Accepted Answer

According to the Sarbanes-Oxley Act, a registered public accounting firm cannot perform bookkeeping or appraisal services for a company it is auditing. Financial systems design may also be restricted if it involves designing systems that relate to financial reporting, but this depends on the specific circumstances and must be evaluated on a case-by-case basis.

Question 10

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​
A) ​scienter was lacking.
B) ​he complied with all International Financial Reporting Standards.
C) ​the negligence was not the proximate cause of the client's losses.
D) ​the negligence was only contributory.

Accepted Answer

In order to successfully defend against a claim of negligence, the defendant must show that their actions were not the proximate cause of the plaintiff's losses. This means that even if the defendant was negligent, if their actions did not directly lead to the plaintiff's harm, they may not be held liable. Compliance with reporting standards or the existence of scienter (knowledge of wrongdoing) may also be relevant, but whether the negligence was the proximate cause of the harm is the most important factor. Contributory negligence is not a defense, as it only reduces the damages awarded to the plaintiff.

Question 11

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards​
A) ​does not indicate that Norman was negligent.
B) ​is prima facie evidence that Norman was negligent.
C) ​precludes Norman from raising any defense against a negligence claim.
D) ​is embarrassing but will never subject Norman to liability.

Accepted Answer

Violation of generally accepted accounting principles and generally accepted auditing standards is considered prima facie evidence of negligent conduct. Therefore, it can be used as proof against Norman in a negligence claim.

Question 12

Tyson accuses Ulman, an attorney, of committing malpractice. Malpractice is​
A) ​constructive fraud.
B) ​a defalcation.
C) ​none of the choices.
D) ​professional negligence.

Accepted Answer

Malpractice is 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 in similar circumstances.

Question 13

Gift Company's liabilities exceed its assets. Gift hires Hill & Dale, an accounting firm, to prepare a balance sheet. Through negligent omissions, the sheet shows a net worth. Invest Bank relies on it to make a loan to Gift. When the firm defaults, the bank files a suit against Hill & Dale. Under the Restatement (Third) of Torts, Hill & Dale is most likely​
A) ​liable because Hill & Dale owed a duty of care to Gift.
B) ​liable because Hill & Dale owed a duty to any foreseeable user.
C) ​liable if Hill & Dale knew that the bank would rely on the balance sheet.
D) ​not liable because Hill & Dale and the bank were not in privity.

Accepted Answer

The answer of Gift Company's liabilities exceed its assets. Gift...

Question 14

Lou, an attorney, allows a statute of limitations to lapse on a claim by Metal Fabrication Company, a client. Lou​
A) ​can be held liable for malpractice.
B) ​has violated an ethical standard but cannot be held liable.
C) ​is subject to criminal penalties under the statute of limitations.
D) ​will be automatically disbarred.

Accepted Answer

Allowing a statute of limitations to lapse on a claim can be considered legal malpractice, as it is a violation of the duty of care owed to the client. Therefore, Lou can be held liable for malpractice.

Question 15

Ailing Company's liabilities exceed its assets. Ailing hires Brad, an accountant, to certify a balance sheet showing a positive net worth. Credit Bank relies on the balance sheet to make a loan to Ailing. The firm defaults on the loan. Under the Ultramares rule, Brad is most likely not liable because he​
A) ​did not owe a duty of care to any third party.
B) ​is not responsible for his client's finances.
C) ​finished his work before Ailing's loan and default.
D) ​was not in privity with the bank.

Accepted Answer

The answer of Ailing Company's liabilities exceed its assets. Ailing...

Question 16

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​
A) ​any third party.
B) ​no third party with whom the accountant is not in privity or "near privity."
C) ​third parties who are foreseen users of the work.
D) ​third parties who are reasonably foreseeable users of the work.

Accepted Answer

Under the Ultramares rule, an accountant can only be liable to those with whom he or she is in privity or "near privity" of contract. This means that the accountant can only be liable to his or her client and those with whom the client had a relationship that is close enough to create a duty of care owed by the accountant to the third party. This duty of care is typically only owed to reasonably foreseeable users of the accountant's work, but the definition of "near privity" can vary depending on the jurisdiction.

Question 17

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​
A) ​Rollo.
B) ​Systems Analysis.
C) ​Tyra.
D) ​no one-the papers must be destroyed immediately after use.

Accepted Answer

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

Question 18

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​
A) ​actual fraud.
B) ​constructive fraud.
C) ​destructive fraud.
D) ​virtual fraud.

Accepted Answer

Intentionally misstating a material fact to mislead a client is considered actual fraud, which occurs when someone makes a false representation intentionally or recklessly, knowing that it is false, with the intent to deceive and with the result that the victim relies on the misrepresentation to their detriment.

Question 19

Doug, 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, Doug may be liable to​
A) ​no one.
B) ​Felicia only.
C) ​Felicia and Graham.
D) ​Graham only.

Accepted Answer

Section 11 of the Securities Act of 1933 provides that any person who makes or is involved in the making of a false or misleading statement in a registration statement shall be liable to any person who buys a security that is the subject of the registration statement and suffers a loss as a result of such omission or misrepresentation. Both Felicia and Graham bought the securities that are the subject of the registration statement, but only Felicia suffered a loss as a result of the material omission. Therefore, Doug may be liable to both Felicia and Graham under Section 11, but only Felicia is entitled to recover damages due to the material omission.

Question 20

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​
A) ​any third party.
B) ​no third party with whom the accountant is not in privity or "near privity."
C) ​third parties who are foreseen users of the work.
D) ​third parties who are reasonably foreseeable users of the work.

Accepted Answer

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

Quiz 22: Professional Liability and Accountability

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

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

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​

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

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

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​

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​

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

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​

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​

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

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

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

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​

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​

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​

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. Vera is Taylor's attorney. Working papers that Taylor develops when preparing financial reports for Universal Metrics are owned by

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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