Question 1

An auditor who determines a company is materially misstating certain items on its financial statements should issue a(n)

Accepted Answer

An auditor who determines that a company is materially misstating certain items on its financial statements should issue an adverse opinion, which indicates that the financial statements are not in accordance with GAAP and should not be relied upon by users. An unqualified opinion indicates that the financial statements are fairly stated in accordance with GAAP, while a qualified opinion indicates that there is a departure from GAAP that is not material enough to warrant an adverse opinion. A disclaimer of opinion is issued when the auditor is unable to obtain sufficient evidence to form an opinion on the financial statements.

Question 2

Discuss how SEC rules affect the legal and the ethical relationship between accountants and the companies they audit.

Accepted Answer

The answer of Discuss how SEC rules affect the legal...

Question 3

Under SOX,accountants for public companies must keep all audit work papers for at least

Accepted Answer

Under SOX, accountants for public companies must keep all audit work papers for at least seven years. This requirement is aimed at ensuring that auditors can be held accountable for their work and that companies can be audited if necessary. The seven-year period also aligns with the statute of limitations for bringing fraud claims under federal law. Keeping audit work papers for at least seven years is important for ensuring the accuracy and transparency of financial reporting, as well as for maintaining investor confidence in public companies.

Question 4

Larry is a certified public accountant in a firm that audits public companies.Larry is accused of unethical conduct.Is Larry required to abide by the ethical standards of the Public Company Accounting Oversight Board?

Accepted Answer

As Larry is a certified public accountant in a firm that audits public companies, he is required to abide by the ethical standards set forth by the Public Company Accounting Oversight Board (PCAOB). The PCAOB is responsible for establishing and enforcing auditing and ethical standards for auditors of public companies in the United States. Therefore, Larry must adhere to the PCAOB's ethical guidelines to maintain his certification and avoid potential legal consequences.

Question 5

The accounting firm of Gray & Co.did accounting work for both Regional Bank and Carter Electronics.Without Carter's knowledge or approval,Gray & Co.discussed Carter's financial problems with Regional Bank.In this situation,Gray & Co.

Accepted Answer

Accounting firms have a legal obligation to keep all client information confidential, and discussing Carter's financial problems with Regional Bank without their approval violated this obligation.

Question 6

Which of the following is NOT a provision of the Sarbanes-Oxley Act of 2002?

Accepted Answer

The establishment of the American Institute of Certified Public Accountants to develop ethical guidelines in a Code of Professional Conduct was not a provision of the Sarbanes-Oxley Act. The other three provisions listed were included in the act.

Question 7

Criminal liability for accountants

Accepted Answer

Criminal liability for accountants is possible under several laws, including the Securities Act of 1933, the 1934 Act, state securities laws, and the Internal Revenue Code. Violations of these laws can result in fines and even imprisonment. However, there is no criminal liability for violating the accountant-client privilege under federal law.

Question 8

The Big Four accounting firms spend about what percentage of their revenue on litigation,including settlements and insurance?

Accepted Answer

The answer of The Big Four accounting firms spend about...

Question 9

Which statement best describes the 1934 Act's position on whistleblowing?

Accepted Answer

The 1934 Act requires auditors to report any suspected illegal acts to the client's board of directors. Therefore, auditors are expected to blow the whistle to the client's board of directors.

Question 10

Penalties on accountants for wrongdoing in the preparation of tax returns are imposed by the

Accepted Answer

Penalties on accountants for wrongdoing in the preparation of tax returns are imposed by the Internal Revenue Code. The Internal Revenue Code contains a substantial number of provisions that specify tax penalties for various violations of tax laws, including penalties for inaccurate tax returns, fraudulent tax returns, and failing to file tax returns. These penalties are enforced by the Internal Revenue Service (IRS).

Question 11

Sally prepared financial statements for MegaCorp knowing that the company would be using her statements when applying for a loan at Big Bank.It is discovered she was negligent in preparing the statements,and Big Bank sues her.Sally is liable under the

Accepted Answer

Sally is liable under the Ultramares doctrine, the Foreseeable doctrine, and the Restatement doctrine because she was negligent in preparing the financial statements and Big Bank relied on those statements when making the loan decision.

Question 12

GBH,an accounting firm,was hired to prepare financial statements for E-treme.Great State Bank has asked to see GBH's working papers since it is thinking about extending a $4 million line of credit to E-treme.Which of the following statements is correct?

Accepted Answer

GBH cannot show the bank the working papers without E-treme's permission because the working papers are the property of the accounting firm and contain confidential client information. Sharing them without client consent would breach confidentiality agreements and professional ethical standards.

Question 13

Rick prepared financial statements for MegaCorp knowing that it was going to use his statements to apply for a loan with Big Bank.When Big Bank turned MegaCorp down,it applied to Fourth Bank for a loan.MegaCorp presented the statements prepared by Rick to Fourth Bank,which gave the company a loan.It was discovered that Rick was negligent in preparing the statements,and Fourth Bank sued Rick.Under which of the following tests is Rick liable?

Accepted Answer

Rick is liable under both the foreseeable doctrine and the Restatement doctrine because these doctrines expand the scope of liability beyond the Ultramares doctrine, which limits liability to parties in privity of contract or known users of the financial statements. The foreseeable doctrine and the Restatement doctrine allow for liability to third parties that the accountant could reasonably foresee would rely on the financial statements, such as Fourth Bank in this scenario.

Question 14

If a plaintiff is successful in proving that an auditor has violated Section 10(b)of the 1934 Securities Exchange Act,the auditor has

Accepted Answer

Section 10(b) of the 1934 Securities Exchange Act makes it illegal for an individual or entity to engage in fraudulent activities in connection with the purchase or sale of securities. If a plaintiff successfully proves that an auditor violated this section, the auditor will be held responsible for their actions and will have primary liability. Primary liability means that the individual or entity is directly responsible for the harm caused to the plaintiff and can be sued for damages. Therefore, the best choice is option A) primary liability.

Question 15

An engagement letter is a written contract

Accepted Answer

An engagement letter is a written contract between an accountant and client outlining the terms of the professional relationship, including the services to be provided, the responsibilities of each party, and the compensation structure.

Question 16

Adam claimed that N & A,its accounting firm,negligently prepared an audit.To hold the accounting firm liable,which of the following elements must be established?

Accepted Answer

In order to hold the accounting firm liable for negligence in auditing, the element of failure to exercise due care must be established. This means that the accounting firm did not do its job properly and did not use reasonable care in performing the audit. The other options (A, B, and D) are not required elements for proving negligence in auditing.

Question 17

The IRS files criminal charges against Rich for evasion of federal taxes.Rich's accountant,Sonya,is summoned to appear in court to testify against Rich.The state where the incident occurred recognizes an accountant-client privilege.Does Sonya have to testify in federal court against her client?

Accepted Answer

Federal courts do not recognize state-specific privileges such as an accountant-client privilege when it comes to federal crimes, including tax evasion. Therefore, Sonya would have to testify against Rich in federal court despite the state's accountant-client privilege.

Question 18

In which of the following cases will the federal accountant-client privilege protect the information from being disclosed?

Accepted Answer

The answer of In which of the following cases will...

Question 19

John is a CPA in charge of auditing his client,McMillen & Co.John's duty of care to McMillen will most likely be breached if John

Accepted Answer

John's duty of care to McMillen requires adherence to generally accepted auditing standards (GAAS). Failure to follow GAAS could lead to a breach of duty of care. A, B, and C are not necessarily a breach of duty of care, as long as John is fulfilling his responsibilities within GAAS.

Question 20

GBH,an accounting firm,was hired to prepare financial statements for E-treme.GBH

Accepted Answer

Working papers prepared by an accounting firm during an audit or other financial analysis are considered the property of the firm. However, when the client, in this case, E-treme, is the subject of those papers, the firm must allow the client access to them. This is because the client has a vested interest in the information contained within those papers, which pertain to their financial affairs.

Quiz 27: Accountants Liability