Question 1

Usually,a client may receive ________ damages for a breach of contract or negligence.

Accepted Answer

Usually,a client may receive only compensatory damages for a breach of contract or negligence.

Question 2

The central requirement for the primary benefit test is:

Accepted Answer

Under the primary benefit test,a professional's duty of care extends only to those persons for whose primary benefit the professional audits or prepares financial reports and other documents.As such,the central requirement for the primary benefit test is privity of contract.

Question 3

Judge Blue is evaluating a case of professional negligence involving a claim against an auditor.Where will Judge Blue look to determine what the ordinary standard of care is for the auditing profession?

Accepted Answer

Courts and legislatures usually defer to the members of a profession in determining what the ordinary prudent professional would do.Such deference recognizes the lawmakers' lack of understanding of the nuances of professional practice.

Question 4

Which of the following tests requires a professional to know the name of the nonclient who will use his/her work product and the particular purpose for which that person will use the work product?

Accepted Answer

Under the primary benefit test,a professional must know four things: (1)the name of the person who will use his/her work product, (2)the particular purpose for which that person will use the work product, (3)the extent of the use,and (4)the client has the primary intent that the user use the work product.

Question 5

Professionals are sued under securities law usually by:

Accepted Answer

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

Question 6

Which of the following professional liabilities is based on the common law concepts of negligence?

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 7

Which of the following is authorized to conduct periodic inspections of nonprivate company auditors in order to assess whether they are complying with the requirements of the Sarbanes-Oxley Act?

Accepted Answer

The Sarbanes-Oxley Act (SOX)created the Public Company Accounting Oversight Board (PCAOB),which is authorized to conduct periodic inspections of public company auditors to assess whether they are complying with the requirements of SOX.

Question 8

Ritz Co.wished to acquire Smart Inc.In conjunction with its plan of acquisition,Ritz hired Felix,a CPA,to audit the financial statements of Smart.Based on the audited financial statements and Felix's unqualified opinion,Ritz acquired Smart.Within six months,it was discovered that the inventory of Smart had been overstated by $500,000.Ritz commenced an action against Felix.Ritz believes that Felix failed to exercise the knowledge,skill,and judgment commonly possessed by CPAs in the locality,but is unable to prove that Felix either intentionally deceived it or showed a reckless disregard for the truth.Ritz is also unable to prove that Felix had any knowledge that the inventory was overstated.Which of the following would provide Ritz with a proper basis for prevailing in a lawsuit against Felix?

Accepted Answer

Ritz is unable to prove that Felix either intentionally deceived it or showed a reckless disregard for the truth.Ritz also is unable to prove that Felix had any knowledge that the inventory of Smart was overstated.At the most,Ritz might be able to prove that Felix failed to exercise the knowledge,skill,and judgment commonly possessed by CPAs in the locality.As such,negligence and breach of contract would provide Ritz with a proper basis for prevailing in a lawsuit against Felix.

Question 9

In which of the following contexts is a professional most likely to experience a nonclient action?

Accepted Answer

Nonclient actions are rarer outside the accountant context because the work product of nonaccounting professionals is infrequently used by others in an expectable way.As such,an accountant who prepares and/or audits financial statements of companies is most likely to experience nonclient action because those financial statements can be used among others,by banks for giving loans to companies,investors to buy securities,and investment bankers for valuation purposes.

Question 10

If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA,which of the following,if present,would be the CPA's best defense?

Accepted Answer

If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA,the CPA's best defense would be to prove that the false statements were immaterial.

Question 11

In which of the following statements concerning a CPA firm's action is scienter or its equivalent absent?

Accepted Answer

A person acts with scienter when he/she knows of the falsity of a statement or he/she recklessly disregards the truth.Scienter also includes recklessly ignoring facts,actual knowledge of fraud,and intent to gain monetarily by concealing fraud.Mere negligence,which includes performing substandard auditing procedures,is not considered scienter.

Question 12

In a state that has adopted the Ultramares rule and uses the primary benefit test,who amongst the following may hold an accountant liable for common law negligence?

Accepted Answer

In a state that has adopted the Ultramares rule and uses the primary benefit test,only the client and a third party that an accountant knew would rely on the accountant's work for a particular purpose may hold the accountant liable for common law negligence.

Question 13

Under the Restatement (Second)of Torts,which of the following nonclients may sue an accountant for professional negligence?

Accepted Answer

Under the Restatement (Second)of Torts,a creditor who was not known to an accountant but who used the financial statements for the same purpose as the bank whose use of the statements was known to the accountant may sue the accountant for professional negligence.

Question 14

One of the elements necessary to hold a CPA liable to a client for conducting an audit negligently is that the CPA:

Accepted Answer

The general duty that securities 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 or that the advice they give to clients will work out well.The professional's duty to exercise reasonable care is a subset of the negligence standard of tort law.Two elements compose the general duty of performance: skill and care.

Question 15

If a client establishes fraud against a professional,he/she is more likely to receive:

Accepted Answer

The chief advantage of establishing fraud is that the client may get a higher damage award than when the accountant is merely negligent.Usually,a client may receive only compensatory damages for a breach of contract or negligence.By proving fraud,a client may be awarded punitive damages as well.

Question 16

Which of the following is sufficient to establish that a professional has acted with scienter for purposes of common law fraud?

Accepted Answer

A person acts with scienter when he/she knows of the falsity of a statement or he/she recklessly disregards the truth.As such,a professional's reckless ignorance of facts is sufficient to establish that a professional has acted with scienter for purposes of common law fraud.

Question 17

Brady,a CPA,is hired by Stanlee Inc. ,to audit its financial statements.Due to his negligence,Brady fails to discover that Tom,chairman of the board of directors of Stanlee,has embezzled $300,000 of the company funds.Brady finishes the audit and issues an unqualified opinion.Six months later,Brady reads in the newspapers that Tom has been caught for embezzling a total of $800,000 of company funds.Tom has resigned and the company funds have been fully recovered from him.Stanlee sues Brady.How much is Brady liable for?

Accepted Answer

When an accountant negligently fails to discover embezzlement,generally he/she is liable to his/her client only for an amount equal to the embezzlement that occurred after he/she should have discovered the embezzlement.The accountant is usually not liable for any part of the embezzlement that occurred prior to the time he/she should have uncovered the embezzlement unless his/her tardy discovery prevented the client from recovering embezzled funds.Since Stanlee was able to recover the full amount embezzled by Tom ($800,000),Brady will be held liable only for the amount embezzled after he should have discovered it ($500,000).

Question 18

Mr.Orange is an accountant at a publicly traded corporation.To meet the standard of the skill of a professional account what should Mr.Orange have knowledge of?

Accepted Answer

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

Question 19

A professional is not liable for breach of contract if the:

Accepted Answer

A professional is not liable for breach of contract if the client obstructs the performance of the contract.

Question 20

In a state that uses the Restatement (Second)of Torts,who amongst the following may hold an accountant liable for common law negligence?

Accepted Answer

The Restatement (Second)of Torts of 1965 proposed that the common law of professional negligence expand the class of protected persons to foreseen users and users within a foreseen class of users of reports.As such,in a state that uses the Restatement (Second)of Torts of 1965,only the client,a third party that the accountant knew would rely on the accountant's work for a particular purpose,and others who are in the same limited class as that third party may hold an accountant liable for common law negligence.

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