Question 1

Quin,an accountant,prepares for Reddy,Inc.,a financial state?ment that omits a material fact.The statement is included in Reddy's registration statement with the Securities and Exchange Commission.Timor,who reads the statement,and Ubi,who does not,each buy Reddy stock.Velma reads the statement but does not buy the stock.Under Section 11 of the Securities Act of 1933,Quin may be liable to

Accepted Answer

Under Section 11 of the Securities Act of 1933, liability is imposed on those who prepare or sign registration statements containing material misstatements or omissions. Quin may be liable to Timor, who relied on the statement and purchased the stock, and Ubi, who purchased the stock even without reading the statement. Velma, who did not purchase the stock, cannot claim damages under Section 11.

Question 2

Pat,an accountant,includes a false statement in a report for Quantity,Inc.,that is filed with the Securities and Exchange Commis?sion.Quantity publishes a misleading ad about its future prospects.Rita sees the ad and calls Stan,who buys stock in Quantity.Under Section 18 of the Securities Ex?change Act of 1934,liability may attach to

Accepted Answer

Under Section 18 of the Securities Exchange Act of 1934, liability may attach to false or misleading statements made in documents filed with the SEC, such as Pat's report.

Question 3

Longhaul Freight,Inc.,files a suit against Midge,an accountant,under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission.To succeed,Longhaul must show that Midge

Accepted Answer

To succeed in a suit under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission, Longhaul must show that Midge acted with scienter, which means that Midge knew or should have known that the information she provided was false or misleading. The other options (B, C, and D) are not sufficient to succeed in the suit under the given provisions.

Question 4

Penelope is an attorney.Penelope's conduct is governed by rules of professional conduct established by the state in which she is licensed,and the Model Rules of Professional Conduct drafted by

Accepted Answer

The state in which Penelope is licensed may have their own set of rules of professional conduct, but the Model Rules of Professional Conduct are drafted by the American Bar Association specifically for attorneys. Therefore, the best choice is B.

Question 5

National Business Systems Corporation (NBS)files a suit against Molly,its former accountant,alleging constructive fraud.NBS need not prove

Accepted Answer

Constructive fraud does not require proof of intent to deceive, as it is based on a breach of duty that results in misleading another party, regardless of intent.

Question 6

Leslie,an accountant,enters into a contract to provide services to Marty.Leslie does not finish the work within the contract's deadline.Leslie is

Accepted Answer

Leslie is liable for breach of contract for failing to finish the work within the contract's deadline. Being a professional accountant does not absolve her from fulfilling her contractual obligations, and Marty cannot be held responsible for her failure. The fact that the work took longer than foreseen does not excuse Leslie's failure to complete the work within the agreed-upon timeframe.

Question 7

Jim,an accountant,contracts to perform services for Kasey.Jim acts in good faith and conforms with generally accepted accounting principles,but makes a mistake in judgment.Jim is most likely

Accepted Answer

Jim acted in good faith and conformed with generally accepted accounting principles, so he is not liable for making a mistake in judgment. Liability would only arise if he failed to discover a defalcation, fraud or impropriety, but these are not stated to be present in the scenario.

Question 8

Jim,an attorney,allows a statute of limitations to lapse on a claim by Midwest Manufacturing Company,a client.Jim

Accepted Answer

An attorney has a duty of care towards their clients, including ensuring that all necessary legal actions, such as filing a claim within the statute of limitations, are taken to protect their client's interests. Allowing the statute of limitations to lapse on a claim can be considered legal malpractice, and the attorney can be held liable for any damages caused to the client as a result.

Question 9

Pace is an attorney,whose clients include Quikfeet Running Shoes Company.Unless Quikfeet has violated securities law,the contents of Pace's file on Quikfeet may be disclosed to someone other than Quikfeet

Accepted Answer

Attorney-client privilege protects the confidentiality of communications between an attorney and their client, and such information can only be disclosed with the client's consent.

Question 10

Rollo is an attorney whose clients include Superior Credit Company.If Rollo is negligent in his work for Superior,under the Restatement (Second)of Torts,Rollo may be liable to Superior and

Accepted Answer

Under the Restatement (Second) of Torts, an attorney like Rollo may be liable to third parties who are foreseen users of the work, meaning those whom the attorney could reasonably expect to rely on the work.

Question 11

Lebron accuses Moe,an attorney,of committing malpractice.Malpractice is

Accepted Answer

Malpractice refers to professional negligence or a failure to perform duties within the standards of care expected from a professional. It is not a breach of ethics, defalcation or a mistake in judgment.

Question 12

Faith and Gordon are accountants who work together.Faith and Gordon can limit their potential liability for each other's misconduct by organizing their business as

Accepted Answer

The best choice is a professional corporation because it is specifically designed for professionals, such as accountants, who want to limit their personal liability for the misconduct of their colleagues. This type of corporation offers limited liability protection for the owners, while also allowing them to retain their professional licenses and certifications. Non-professional corporations and unincorporated corporations are not suitable for professionals such as accountants because they do not offer sufficient protection for personal liability. A foreign corporation is incorporated in a state or country other than where the business is physically located, and so would not be relevant in this scenario.

Question 13

Grover Nut Company files a suit against Hud,its former account?ant,alleging actual fraud.Grover must prove

Accepted Answer

In order to prove actual fraud, Grover Nut Company must show that Hud had the intent to deceive them. Simply misrepresenting a non-material fact, or causing an injury without the intent to deceive, would not be enough to prove actual fraud. Unjustifiable reliance may also be necessary to prove the case, but the intent to deceive is the key element needed to establish fraud.

Question 14

Dwayne can be described as "a reasonably competent general practitioner of ordinary skill,experience,and capacity." This is the normal standard for judging the performance of

Accepted Answer

The standard of "a reasonably competent general practitioner of ordinary skill, experience, and capacity" is commonly used when judging the performance of an attorney. It sets a basic standard for legal practice and is often used in legal malpractice cases to determine whether an attorney's actions were reasonable under the circumstances.

Question 15

Bob,an accountant,intentionally misstates a material fact to mislead Consolidated Industries,Inc.,a client.Consolidated justifiably relies on the misstatement to its detriment.Bob is most likely liable for

Accepted Answer

Actual fraud occurs when someone intentionally misrepresents material facts with the intent to deceive another party, who then relies on these misrepresentations to their detriment. This scenario fits the definition of actual fraud, as Bob intentionally misstated a material fact to mislead Consolidated Industries, Inc., who justifiably relied on the misstatement to their detriment.

Question 16

Flynn,an accountant,helps Grange Supply Company prepare and file a false federal corporate income tax return.Under the In?ternal Revenue Code,this is

Accepted Answer

Under the Internal Revenue Code, preparing and filing a false federal corporate income tax return is a felony punishable by a fine and imprisonment. Therefore, the best choice is A.

Question 17

Feder prepares federal corporate income tax returns for Giant Stores,Inc.,and other firms.Under the Internal Revenue Code,with respect to an understatement of a client's tax liability,Feder may be liable for

Accepted Answer

Under the Internal Revenue Code, a tax return preparer may be held liable for an understatement of a client's tax liability due to their negligent or willful conduct. Therefore, Feder may be held liable for an understatement of his client's tax liability if he engages in negligent or willful misconduct.

Question 18

Lucille,an accountant,is subject to the ac?counting conventions,rules,and procedures that constitute generally ac?cepted accounting principles (GAAP).GAAP are determined by

Accepted Answer

GAAP are determined by the Financial Accounting Standards Board (FASB), a private sector organization designated by the Securities and Exchange Commission (SEC) to establish accounting standards for public companies in the United States. While the other entities listed may have some influence or involvement in accounting standards and regulations, the FASB is the primary authoritative source for GAAP in the US.

Question 19

Craig is an accountant whose clients include Digby National Corporation.Elbert is Craig's attorney.Working papers that Craig develops when preparing financial reports for Digby are owned by

Accepted Answer

Working papers developed by an accountant during the preparation of financial reports are typically owned by the accountant, in this case, Craig.

Question 20

Marquis Company's liabilities exceed its assets,but the firm's employees falsify its books to reflect a positive net worth.Marquis hires Nan & Ollie,an accounting firm,to prepare a balance sheet,which is certified to show a net worth.Pure Credit Corporation relies on the balance sheet to make a loan to Marquis.When the firm defaults,Pure Credit files a suit against Nan & Ollie.Under the Ultramares rule,the accounting firm is most likely

Accepted Answer

Under the Ultramares rule, an accountant is only liable for negligence to those with whom they have privity of contract or a relationship so close as to approach that of privity. Nan & Ollie did not have a direct contractual relationship with Pure Credit, so they cannot be held liable for the loan that Pure Credit made to Marquis. Therefore, choice D is the best answer.

Quiz 48: Professional Liaility and Accountability