Question 1

Under two of the subsections of Section 17(a)of the Securities Act of 1933,an investor need prove only negligence by the accountant.

Accepted Answer

Under two of the subsections of Section 17(a)of the Securities Act of 1933,an investor need prove only negligence by the accountant,underwriter,broker,or adviser.

Question 2

An accountant performing an audit of a client has a specific duty to uncover an employee's embezzlement from the client.

Accepted Answer

Ordinarily,an accountant has no specific duty to uncover employee fraud or embezzlement.

Question 3

Under Section 11 of the Securities Act of 1933,an underwriter is liable for errors in the entire registration statement because an underwriter is an expert.

Accepted Answer

Because the underwriter is not an expert under Section 11 of the Securities Act of 1933,the underwriter is liable for errors in the entire registration statement.Since an auditor is an expert,the auditor is liable only for the part of the registration statement contributed by the auditor because an auditor is an expert.

Question 4

The duty of trust requires a professional to maintain confidentiality.

Accepted Answer

The duty of trust requires a professional to maintain the confidentiality of the client's information entrusted to the firm.

Question 5

Joe Smith is a recent graduate from Sunset College.While at Sunset College,he majored in Business.In his interview for an auditor position at Supermart Inc. ,Mr.Smith convinced the hiring manager he knew enough accounting to perform the job,but in fact,Mr.Smith does not understand Generally Accepted Auditing Standards (GAAS).Mr.Smith has failed to show professional care and could be liable for his actions as an auditor because of his lack of skills.

Accepted Answer

A professional must have the skill of an individual in her profession.For example,an auditor would need to know generally accepted auditing standards (GAAS).

Question 6

If a state recognizes a privilege,like accountant-client privilege,then the federal courts in that jurisdiction will also allow that privilege.

Accepted Answer

Generally,the state-granted privileges are recognized in both state and federal courts deciding questions of state law.Nonetheless,federal courts do not recognize the privilege in matters involving federal questions,including antitrust,securities,and criminal matters.

Question 7

An accountant can be required to bring his/her working papers into court and to testify as to matters involving the client's tax records and discussions with the client regarding tax matters.

Accepted Answer

Federal courts do not recognize the professional-client privilege in matters involving federal questions,including antitrust,securities,and criminal matters.Consequently,an accountant can be required to bring his/her working papers into court and to testify as to matters involving the client's tax records and discussions with the client regarding tax matters.

Question 8

The professional's duty to exercise reasonable care is a subset of the negligence standard of tort law.

Accepted Answer

The professional's duty to exercise reasonable care (malpractice)is a subset of the negligence standard of tort law.

Question 9

Professionals' tort liability to their clients may be based only on the common law concepts of negligence and fraud.

Accepted Answer

Professionals' tort liability to their clients may be based on the common law concepts of negligence and fraud or on the violation of a statute,including the federal and state securities laws.

Question 10

Usually,only clients sue professionals under the securities law.

Accepted Answer

Although some sections of various securities laws permit clients to sue professionals,they are rarely used for that purpose.Usually,only third parties (nonclients)sue under the securities law.

Question 11

Under Section 11 of the Securities Act of 1933,an auditor may escape liability by proving he/she had no reason to believe and did not believe that there were any misstatements or omissions of material fact in the financial statements he/she audited.

Accepted Answer

Under Section 11 of the Securities Act of 1933,the due diligence defense for auditors requires that an auditor issuing an opinion regarding financial statements prove that he/she made a reasonable investigation and that he/she reasonably believed that there were no misstatements or omissions of material fact in the financial statements at the time the registration statement became effective.

Question 12

A professional may delegate his/her duty without the consent of the client.

Accepted Answer

A professional may not delegate his/her duty to perform a contract without the consent of the client.

Question 13

Mr.Blue is a very good accountant at Supermart Inc.Mr.Blue acts with great care and accuracy.But with changing laws and various inaccurate information provided to him by other employees,Mr.Blue is responsible for Supermart owing the IRS $50,000.The CEO of Supermart wants to discharge and sue Mr.Blue for failure to exercise professional care (i.e. ,professional negligence).Mr.Blue is liable for professional negligence and can be discharged and sued for the mistake.

Accepted Answer

Professionals must act carefully but they are not guarantors that the advice they give will work well.

Question 14

Courts and legislatures in dealing with professional negligence usually defer to the members of a profession to determine what the professional standard should be.

Accepted Answer

Courts and legislatures usually defer to the members of a profession in determining what the ordinary prudent professional would do.

Question 15

Proof of aiding and abetting another person's securities violation is not sufficient misconduct to overcome the privity requirement of Section 12(a)(2)of the Securities Act of 1933.

Accepted Answer

Professionals who merely aid and abet a client's Section 12(a) (2)violation of the Securities Act of 1933 will not have liability for damages under Section 12(a) (2).

Question 16

The Securities Exchange Act of 1934 does not impose any criminal liability for violation of any of its provisions.

Accepted Answer

The 1934 Act imposes criminal penalties for willful violations of any section of the 1934 Act,such as Sections 10(b)and 18,and any 1934 Act rule or regulation,such as Rule 10b-5.

Question 17

Under the Sarbanes-Oxley Act of 2002,public accounting firms that audit financial statements of public companies are required to register with the Public Company Accounting Oversight Board and submit to its rules.

Accepted Answer

Under the Sarbanes-Oxley Act of 2002,public accounting firms that audit financial statements of public companies are required to register with the Public Company Accounting Oversight Board (PCAOB)and submit to its rules.

Question 18

The general duty of professionals requires them to be guarantors of the accuracy of their work.

Accepted Answer

The general duty that professionals owe to their clients is to exercise the skill and care of the ordinarily prudent professional in the same circumstances.Hence,professionals must act carefully and diligently;they are not guarantors of the accuracy of their work.

Question 19

By issuing a qualified opinion,an auditor escapes liability for defects in financial statements audited by the auditor.

Accepted Answer

Even after issuing a qualified opinion,an auditor may not escape complete liability for defects in financial statements audited by the auditor because letters that purport to disclaim liability totally for false and misleading financial statements are too general to excuse an accountant from exercising ordinary skill and care.

Question 20

The work papers and documents that a professional receives from a client to perform services like auditing or accounting will remain the property of the client.

Accepted Answer

The personal records that a client entrusts to a professional during an engagement,such as accounting records during an audit,remain the property of the client.

Quiz 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals