Question 1

An accountant may be found liable for aiding and abetting if she encourages or participates in the publication of misleading information.

Accepted Answer

Aiding and abetting involves knowingly helping someone else commit a wrongful act. If an accountant encourages or participates in the publication of misleading information, she may be considered to have aided and abetted in the commission of a possible securities fraud or other unlawful activity. As such, she could be held liable for any damages resulting from the dissemination of that information.

Question 2

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

Accepted Answer

False

Question 3

Lack of negligence can be proved by demonstrating that the accountant was in compliance with GAAP and GAAS.

Accepted Answer

Compliance with GAAP (Generally Accepted Accounting Principles) and GAAS (Generally Accepted Auditing Standards) is a standard for accountants to follow. If an accountant is in compliance with these standards, it may be difficult to prove negligence as they are following industry regulations and standards. However, this does not mean that an accountant cannot be found negligent in other areas of their work, such as failure to communicate with their client or using inaccurate information.

Question 4

Winslow Manufacturing sought a loan from National Lending Corporation.In connection with the loan application,National required that Winslow submit certain audited financial statements.Winslow had an audit performed by an independent CPA,who submitted his report to Winslow under the presumption that his report was to be used solely for the purpose of negotiating a loan from National.After National rejected Winslow's loan application,Winslow submitted the CPA's report to other lenders in connection with its loan applications with them.It was subsequently learned that the CPA,despite the exercise of reasonable care,had failed to discover a sophisticated embezzlement scheme by Winslow's chief accountant.Under these circumstances,the CPA is:

Accepted Answer

There are numerous legal theories under which an accountant might be found liable.However,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.In the above case,since the CPA has not breached the duty to exercise ordinary skill and care he is not liable to any of the parties.

Question 5

A CPA firm agrees to complete an audit by the 28^th of February 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:

Accepted Answer

A CPA firm agrees to complete an audit by the 28^th of February 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 the accountant 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 6

Liability under Rule 10b-5 of the 1934 Act requires scienter.

Accepted Answer

Rule 10b-5 of the Securities Exchange Act of 1934 imposes liability for securities fraud, including misrepresentations or omissions of material facts. To establish liability, the plaintiff must prove that the defendant acted with scienter, or an intent to deceive, manipulate, or defraud.

Question 7

An accountant's duty of care is limited to their actions during the audit itself.

Accepted Answer

An accountant's duty of care extends beyond the audit itself and includes considering and disclosing any potential risks or errors found during the audit. They may also have a responsibility to report any suspected unethical behavior or fraud discovered during the audit. Therefore, their duty of care is not limited only to their actions during the audit, but also extends to the results of the audit and any relevant disclosures or reporting.

Question 8

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

Accepted Answer

Scienter refers to a deliberate intent to deceive or manipulate, which is a key element in securities fraud. If an accountant is acting with reckless disregard for the truth, they may be intentionally providing false information, which would constitute scienter.

Question 9

An accountant may not delegate his/her duties to someone else without the consent of the client.

Accepted Answer

An accountant is bound to maintain professional standards and cannot delegate their responsibilities without the client's consent. It is their duty to ensure that work assigned to others meets the necessary standards and is compliant with regulatory requirements.

Question 10

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 is true. The burden is on the party asserting the privilege to prove that the documents were created in anticipation of litigation.

Question 11

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 limited recovery in a negligence suit against an accountant to only those with a direct contractual relationship with the accountant. However, in many jurisdictions, this doctrine has been relaxed or eliminated, allowing for recovery by third parties who can demonstrate that they were intended beneficiaries of the accountant's work or that there was a close relationship between the accountant and the third party.

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

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 14

Under Section 11 of the Securities Act of 1933,a purchaser must sue the accountant within ten 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 15

Saxon Inc.entrusted Thomas Simpson,an independent CPA,to prepare an audit report to apply for a loan from Sharp Lenders.Simpson merely accepted the accuracy of the client's books without proper investigation while representing that he had completed Saxon's audit.A careful audit,however,would have discovered that an employee of Saxon's was regularly embezzling funds from him.Simpson is:

Accepted Answer

Suppose 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.

Question 16

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 answer of An accountant's liability to third persons for...

Question 17

The Restatement approach employs a "reasonably foreseeable" standard.

Accepted Answer

The answer of The Restatement approach employs a "reasonably foreseeable"...

Question 18

An accountant is not required to reimburse a client for a penalty imposed for late filing if the delay is caused by the accountant.

Accepted Answer

An accountant may be required to reimburse a client for penalties if the delay was due to the accountant's negligence or error, depending on the terms of their agreement and applicable laws.

Question 19

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.

Question 20

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 accountant's responsibility to uncover fraud. While they have a duty to perform their work with due care, they are not expected to be a detective or uncover every instance of fraud. It is ultimately the client's responsibility to prevent and detect fraud within their organization.

Quiz 32: Legal Liability of Accountants