Question 1

An example of a breach of contract would likely include

Accepted Answer

A breach of contract occurs when one party fails to fulfill their obligations as outlined in a contract. In this case, the CPA firm's failure to complete an audit on the agreed-upon date due to prioritizing other work is a clear example of not fulfilling contractual obligations.

Question 2

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

Accepted Answer

The definition provided refers to ordinary negligence, which is the failure to exercise reasonable care in a given situation. Pecuniary negligence is not a commonly used term, and gross negligence and extreme negligence refer to a higher degree of negligence, beyond ordinary negligence.

Question 3

If the CPA negligently failed to properly prepare and file a client's tax return, the CPA may be liable for

Accepted Answer

The answer of If the CPA negligently failed to properly...

Question 4

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 partners of a CPA firm are not responsible for the work of employees of the audit client. They are responsible for the work of employees of the CPA firm, other CPA firms engaged to do part of the audit work, and specialists employed by the CPA firm to provide technical advice on the audit.

Question 5

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 6

Which of the following most accurately describes constructive fraud?

Accepted Answer

Constructive fraud refers to a situation where there is extreme or unusual negligence without the intent to deceive. This means that the person did not purposely set out to deceive someone, but still acted in a way that was negligent or careless. Options A and B refer to ordinary negligence, while option C refers to actual fraud where the person intended to deceive.

Question 7

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

Accepted Answer

Statutory laws are laws created by legislative bodies, such as the U.S. Congress or state legislatures. These laws are written down and codified, and are enforceable by the government. Judicial laws, also known as case law, are created by the decisions of judges in court cases. Federal laws are laws that are created at the national level, by the U.S. Congress or other federal agencies. Common laws are laws based on tradition and precedent, rather than legislation, and are only relevant in certain jurisdictions. Therefore, the best choice is A.

Question 8

Fraud occurs when

Accepted Answer

Fraud requires both a misstatement and the intent to deceive, so choice A is the only option that includes both elements. Choice B includes the misstatement but not the intent to deceive, while choices C and D relate to levels of care in the audit and do not address the intent to deceive.

Question 9

In the performance of an audit, a CPA

Accepted Answer

A CPA must exercise due professional care, which involves maintaining an appropriate level of professional skepticism, assessing the risk of material misstatement, and obtaining sufficient and appropriate audit evidence to support the opinion issued. While a CPA has a responsibility to detect material fraud, they are not expected to detect immaterial fraud. Privately held clients may not be subject to GAAP, but the auditor should follow the applicable accounting framework and related standards, such as GAAS.

Question 10

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 a party to a contract but is intended to benefit from the contract. In this case, the CPA and client have agreed to provide certain benefits to a third party, making them a third-party beneficiary.

Question 11

A third-party beneficiary is one which

Accepted Answer

A third-party beneficiary is someone who is not a party to the contract but is intended to benefit from it. They do not have privity of contract, meaning they are not directly involved in the transaction or have a legal relationship with the parties involved. However, they are known to the parties and their benefit is intended, making them a valid beneficiary under the contract. Option A, B, and D are incorrect as they do not accurately define a third-party beneficiary.

Question 12

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 prudent person concept is the standard of due care to which auditors are expected to adhere in the performance of the audit. This concept requires the auditor to exercise the same level of care, skill, and diligence that a prudent person would exercise under similar circumstances. The auditor is expected to be diligent in planning and performing the audit, obtaining sufficient and appropriate audit evidence, evaluating the results of the audit procedures, and making appropriate conclusions and opinions based on the audit evidence.

Question 13

Which of the following most accurately describes fraud?

Accepted Answer

Fraud involves knowledge and intent to deceive, whereas the other answer choices pertain to negligence or lack of care.

Question 14

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

Accepted Answer

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

Question 15

Privity of contract exists between

Accepted Answer

Privity of contract exists between the auditor and the client. This means that only the parties involved in the contract have a legally binding agreement, and third parties do not have any rights or obligations under the contract. The auditor has a contractual relationship with the client, and the services provided by the auditor are for the benefit of the client. The client can sue the auditor for breach of contract, but third parties are not party to the contract and cannot sue the auditor for any damages caused to them.

Question 16

The legal issue with regards to the Big Four CPA firms being required to comply with the Fair Labor Standards Act with regards to overtime pay policies and procedures is settled.

Accepted Answer

The legal issues surrounding the Big Four CPA firms and their compliance with the Fair Labor Standards Act (FLSA) regarding overtime pay policies and procedures have been subject to ongoing litigation and debate, indicating that the matter is not fully settled. Changes in regulations, interpretations, and court decisions can affect the status of compliance and enforcement, making this a continually evolving area of law.

Question 17

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 failed to perform as agreed upon in the contract. Contract fraud, constructive fraud, and criminal neglect do not specifically pertain to breaching contractual obligations.

Question 18

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 means that each defendant is individually responsible for the full amount of damages or loss suffered by the plaintiff, regardless of the degree of fault or contributions of other defendants.

Question 19

In the case of an audit, recklessness 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 is a description of the legal term

Accepted Answer

Constructive fraud involves a situation where recklessness is present, such as when an auditor knows an adequate audit was not done but still issues an opinion without intending to deceive. It does not require intent to deceive, distinguishing it from actual fraud, and is more severe than negligence, making it different from ordinary or gross negligence.

Question 20

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

Accepted Answer

The assessment against a defendant of that portion of the damage caused by the defendant's negligence is known as separate and proportionate liability. This means that the defendant is only responsible for the damages they caused, rather than being held jointly and severally liable with other parties.

Quiz 5: Legal Liability