Question 1

Hawthorne Corp.entrusted Edgar,an independent accountant,to prepare an audit report to apply for a loan from Daft Corp.Edgar accepted the accuracy of the client's books without proper investigation while representing that he had completed Hawthorne's audit.A careful audit,however,discovers later that an employee of Hawthorne Inc.was regularly embezzling funds.In this scenario,Edgar:

Accepted Answer

If an accountant represents that he completed an audit of the client when in reality he merely accepted the accuracy of the client's books without investigation and a careful audit discovers that an employee of the client was regularly embezzling funds from the client, the accountant may be liable in fraud for any losses suffered by the client from the time when the audit should have discovered the embezzlement. In the above case, Edgar is liable to Hawthorne Corp. for any losses it suffered as a result of Edgar's failure to discover the embezzlement.

Question 2

Under the Restatement approach,the accountant is liable only to those third parties who are "specifically foreseeable."

Accepted Answer

Under the Restatement approach, an accountant is liable only to those third parties who are specifically foreseeable, meaning those who the accountant could reasonably anticipate would rely on their work product. This is known as the "foreseeability" test for accountant liability.

Question 3

In an administrative hearing conducted by the Securities and Exchange Commission (SEC),an accountant who violates the federal securities acts is given final order by the administrative law judge.

Accepted Answer

False

Question 4

State licensing boards that regulate the ethical conduct of the accounting profession strictly regulate the accountants' right to advertise their services to the public.

Accepted Answer

The answer of State licensing boards that regulate the ethical...

Question 5

The Reasonably Foreseeable Users approach exposes a negligent accountant to lesser liability than do the Ultramares and Restatement approaches.

Accepted Answer

The Reasonably Foreseeable Users approach actually exposes a negligent accountant to greater liability than the Ultramares and Restatement approaches, as it extends liability to any third party that the accountant could reasonably foresee as relying on their work.

Question 6

Accuracy Group,an accounting firm,has been given a deadline by its client to prepare an audit report by February 28.The deadline was proposed by a prospective lender to the client.Accuracy Group agrees to complete the audit by February 28.If the audit report is not finished until after the deadline,then Accuracy Group would:

Accepted Answer

Accuracy Group agrees to complete an audit by February 28 because it has been informed of a deadline set by a prospective lender to the client. If the audit report is not finished until the end of March, then it would be liable for the client's resulting loss if the lender has no more funds available at that time. Ordinarily, an accountant may not delegate her responsibilities without the consent of the client. This is because the contract is a personal one, based on the skill, training, and personality of the accountant.

Question 7

Jiang,an accountant,is assigned by Wanley Inc.to perform an audit and prepare an annual report for its shareholders.Jiang fails to execute his duty with sincerity as he fails to discover embezzlement by a chief accountant of the firm,which is later discovered by the firm's creditors.In this scenario,Jiang's breach of duty might also trigger an action in breach of the contract between Jiang and Wanley Inc.because:

Accepted Answer

The main basis of liability for accountants is the duty to exercise ordinary skill and care. Breach of this duty may lead to an action grounded in the tort of negligence. Closely related are the suits stemming from the agency relationship between the accountant and the client. As this relationship is contractual in nature, breach of the duty might also trigger an action in breach of contract. In the above case, Jiang failed to execute his duty with sincerity as he did not discover embezzlement by a chief accountant of the firm. Hence, his breach of duty might also trigger an action in breach of contract.

Question 8

Under Section 11 of the Securities Act of 1933,a purchaser must sue the accountant within three years after the time the misstatement or omission in the registration statement was or should have been discovered.

Accepted Answer

Under Section 11 of the Securities Act of 1933, a purchaser must sue within one year after the discovery of the misstatement or omission, and no later than three years after the security was offered to the public.

Question 9

Lack of negligence can be proved by demonstrating that an accountant was in compliance with generally accepted accounting principles (GAAP)and generally accepted auditing standards (GAAS).

Accepted Answer

Compliance with GAAP and GAAS is one way to demonstrate lack of negligence by an accountant.

Question 10

The failure of an accountant to discover fraud by the client's employees or others would not be considered proof of negligence by the accountant.

Accepted Answer

It is not the responsibility of an accountant to discover fraud. However, if they do become aware of fraud, they have a duty to report it. Failure to report it could result in liability.

Question 11

An accountant who shows a reckless disregard for the truth may be said to be acting with scienter.

Accepted Answer

Scienter is a legal term that refers to knowingly or recklessly making false statements or omitting information with the intent to deceive or manipulate. Therefore, if an accountant shows a reckless disregard for the truth, they may be said to be acting with scienter.

Question 12

Which of the following statements is true of negligence by an accountant?

Accepted Answer

The traditional defenses of contributory negligence and comparative negligence may apply in a negligence action against an accountant. However, many courts hesitate to allow the client's contributory negligence to excuse the accountant's negligence because of the accountant's superior skills. The defense is more likely to succeed in an instance in which the client failed to follow the accountant's advice or in which the client already was aware of the irregularities before the accountant failed to discover them.

Question 13

The privity doctrine does not limit recovery from a suit to those with a direct contractual relationship to the accountant.

Accepted Answer

The privity doctrine traditionally required a direct contractual relationship between the plaintiff and the defendant (such as between a client and their accountant) for a lawsuit to be pursued. However, many states have since adopted alternative approaches, such as allowing third-party beneficiaries or foreseeable users of the accountant's services to bring suit. Therefore, the privity doctrine may still have some impact on recovery, but it is not an absolute limitation.

Question 14

A client owns the working papers prepared by an accountant in connection with services performed for the client.

Accepted Answer

Working papers are the property of the accountant or the accounting firm, not the client. They are used to document the work performed and support the accountant's conclusions.

Question 15

The party asserting the work product privilege bears the burden of establishing that the documents he seeks to protect were prepared in anticipation of litigation.

Accepted Answer

This statement is correct. The party seeking to protect documents under the work product privilege must show that the documents were prepared for the purpose of litigation or anticipated litigation. This burden falls on the party asserting the privilege.

Question 16

An accountant cannot be held liable for aiding and abetting misleading information if the information were prepared by others.

Accepted Answer

An accountant can still be held liable for aiding and abetting if they knew or should have known that the information was misleading, even if it was prepared by others.

Question 17

An accountant ordinarily does not delegate his or her duties to someone else without the consent of the client.

Accepted Answer

An accountant must obtain consent from the client before delegating any duties to anyone else. The accountant remains ultimately responsible for the accuracy and completeness of the work.

Question 18

Reliance is the most essential element in a case governed by Section 11(a)of the Securities Act of 1933.

Accepted Answer

Reliance is not required for a claim under Section 11(a) of the Securities Act of 1933; it focuses on material misstatements or omissions in a registration statement.

Question 19

An accountant's liability to third persons for negligence is generally barred by the privity doctrine unless the accountant should have foreseen that the third party would rely on the audit.

Accepted Answer

The privity doctrine limits an accountant's liability to third parties unless the accountant could reasonably foresee that the third party would rely on the audit, which creates an exception to the privity requirement.

Question 20

Generally accepted accounting principles:

Accepted Answer

Organizations representing the public accounting profession have developed and issued guidelines for conducting accounting work. Generally accepted accounting principles (GAAP) apply to the way business transactions should be recorded. Generally accepted auditing standards (GAAS) give directions to accountants in auditing the books of an enterprise.

Quiz 32: Legal Liability of Accountantspart Six Property