Question 1

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

Since Jim acted in good faith and conformed with generally accepted accounting principles, it is unlikely that he would be held liable for making a mistake in judgment. Liability would only arise if he failed to discover a defalcation, fraud, or impropriety, which is not the case in this scenario. Therefore, D is the best choice.

Question 2

Pat, an accountant, includes a false statement in a report for Quantity, Inc., that is filed with the Securities and Exchange Commission. 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 Exchange Act of 1934, liability may attach to

Accepted Answer

The answer of Pat, an accountant, includes a false statement...

Question 3

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

Accepted Answer

GAAP are determined by the Financial Accounting Standards Board which sets accounting standards for the United States.

Question 4

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

The answer of Pace is an attorney, whose clients include...

Question 5

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 Model Rules of Professional Conduct are drafted by the American Bar Association to provide guidance and rules for attorneys in the United States. While each state also has its own rules of professional conduct, they are often based on the Model Rules. The other options (federal courts, AICPA, and IASB) do not have jurisdiction over attorneys or the practice of law.

Question 6

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, or an intent to deceive, manipulate, or defraud. Buying or selling a security is not a requirement for liability under these provisions. Incompetence or knowledge about securities is also not relevant to liability under these provisions.

Question 7

Quin, an accountant, prepares for Reddy, Inc., a financial statement 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

The answer of Quin, an accountant, prepares for Reddy, Inc.,...

Question 8

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

The answer of Craig is an accountant whose clients include...

Question 9

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

The answer of Rollo is an attorney whose clients include...

Question 10

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

Accepted Answer

Malpractice refers to professional negligence, or a failure to provide the level of care and skill that a reasonable person in the same profession would provide in similar circumstances. Therefore, the most accurate choice would be D) professional negligence.

Question 11

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, tax return preparers are potentially liable for an understatement of a client's tax liability due to either negligent or willful misconduct. Therefore, option A is the correct answer.

Question 12

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 as failing to complete the work within the contract's deadline is a violation of the agreement between Leslie and Marty. Being a professional does not exempt Leslie from fulfilling contractual obligations, and the delay cannot be blamed on Marty unless specifically provided for in the contract. Additionally, the fact that the work took longer than foreseen does not excuse Leslie from fulfilling the terms of the contract unless the delay was due to circumstances beyond Leslie's control, which would need to be addressed in the contract.

Question 13

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 third parties with whom the accountant was in privity or near-privity. Privity or near-privity requires a relationship between the accountant and the third party that is sufficiently close to justify imposing liability. In this case, Nan & Ollie were not in privity with Pure Credit and therefore, are not liable for any negligence.

Question 14

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

Faith and Gordon, as accountants, can organize their business as a professional corporation. This type of corporation allows professionals such as accountants, doctors, and lawyers to limit their personal liability for the malpractice of their colleagues. However, it is important to note that this form of organization is only available to licensed professionals and has specific requirements and restrictions.

Question 15

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

Accepted Answer

Attorneys have a duty to provide competent representation to their clients, which includes timely filing of claims and meeting deadlines, such as the statute of limitations. Allowing a statute of limitations to lapse can result in harm to the client and is a breach of this duty. As a result, the attorney can be held liable for malpractice.

Question 16

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

Accepted Answer

Under the Internal Revenue Code, knowingly aiding in the preparation and filing of a false tax return is considered a felony punishable by both a fine and imprisonment.

Question 17

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 description given is commonly used in the legal field to establish the standard of care for a general practitioner. It is not typically used to judge the performance of a client, accountant, or tax preparer.

Question 18

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 requires intent to deceive, a material misstatement, justifiable reliance, and damages. In this scenario, Bob intentionally misstated a material fact to mislead Consolidated and Consolidated justifiably relied on the misstatement to its detriment, satisfying all elements of actual fraud. Constructive fraud (also known as negligence) occurs when the defendant's behavior falls short of the standard of care and causes harm, but there is no intent to deceive. Destructive fraud and virtual fraud are not recognized legal terms.

Question 19

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

Accepted Answer

For constructive fraud, NBS need not prove intent to deceive on the part of Molly. However, NBS still needs to prove justifiable reliance, materiality, and potentially detrimental reliance.

Question 20

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

Accepted Answer

To prove actual fraud, Grover Nut Company must show that Hud had the intent to deceive them. This requires showing that Hud made false representations knowingly and with the intention of inducing reliance on those representations by Grover Nut Company.

Quiz 48: Professional Liaility and Accountability