Question 1

Who may sue an auditor under common law for a tort?

Accepted Answer

The answer of Who may sue an auditor under common...

Question 2

The Securities Act of 1934 has the primary objective of regulating which of the following?

Accepted Answer

The Securities Act of 1934 is primarily concerned with regulating the trading of securities after they are initially issued. The Act requires companies to register their securities with the Securities and Exchange Commission (SEC) before they can be traded on national exchanges. The Act also regulates securities brokers and dealers, ensures disclosure of material information by issuers, and prevents insider trading and market manipulation.

Question 3

Which of the following is considered a failure to perform a contractual duty that has not been excused?

Accepted Answer

Breach of contract is the failure to perform a duty that has been specified in a contract. This breach can be material or immaterial, and it can occur due to negligence, incapacity, or lack of good faith. If the breach has not been excused, the other party may be entitled to remedies, such as damages or cancellation of the contract. Malpractice, fraud, and third-party defense are not necessarily related to contractual obligations.

Question 4

If an auditor does not complete an audit according to the terms of the engagement letter,there is a risk that the auditor will be sued for

Accepted Answer

If an auditor does not complete an audit according to the terms of the engagement letter, they will be in breach of contract with their client. This could result in legal action being taken against the auditor for failing to fulfill their contractual obligations.

Question 5

The auditor of Moab Ridge,Inc.and subsidiaries,a public company,performs a valuation analysis for the purpose of testing the goodwill for impairment.Moab Ridge did not have a valuation analysis performed previously and will use the auditors' valuation for internal purposes as well.The above situation best represents which of the following?

Accepted Answer

According to the AICPA's Code of Professional Conduct, performing a valuation analysis is a prohibited nonattest service for an auditor of a publicly traded company, because it creates a self-review threat to the independence and objectivity of the auditor. Therefore, the auditor's actions in this situation represent a prohibited service.

Question 6

The Jaillet v.Cashman gives indication to which of the following?

Accepted Answer

The Jaillet v. Cashman case suggests that mass dissemination of erroneous financial information may give way to corporate lawsuits as the defendant, Cashman, was accused of spreading false financial information about the plaintiff's company, which led to a decrease in stock value and eventually a lawsuit. The other options are not relevant to this case.

Question 7

Which aspect of statutory law places the burden of proof onto the auditor?

Accepted Answer

The Securities Act of 1933 places the burden of proof on the auditor to demonstrate that they were not negligent in their audit of financial statements.

Question 8

Defensive auditing includes all of the following except

Accepted Answer

Defensive auditing includes taking proactive measures to manage risks associated with providing audit services to clients. Options A, C, and D are all examples of proactive measures. Option B is not an example of a proactive measure because knowing when a client is about to fire the firm is reactive, rather than proactive.

Question 9

Which of the following is an example of Joint and Several Liability?

Accepted Answer

Joint and several liability means that each defendant is individually responsible for the entire amount of damages, even if another defendant was also at fault. Therefore, David, CPA will be required to pay 100% of the damages, even though he is only 40% responsible.

Question 10

An intent to deceive is best known in the regulatory arena as which of the following?

Accepted Answer

An intent to deceive is known as scienter in the regulatory arena. It refers to the knowledge or intention to deceive or defraud someone. It is often used in cases of securities fraud or insider trading. Contributory negligence, ordinary negligence, and gross negligence refer to different types of negligence in a civil lawsuit.

Question 11

The Securities Act of 1933 regulates which of the following?

Accepted Answer

The Securities Act of 1933 requires corporations to file registration statements with the SEC when issuing new securities to the public, in order to provide investors with accurate and complete information about the securities being offered. This helps to prevent fraudulent or misleading practices in the securities markets. Option A is incorrect because the Securities Act does not require all corporations to register with the federal government; instead, it only pertains to securities offerings made to the public. Option B is also incorrect because the Securities Act does not regulate state-level registration of corporations. Option C is partially correct, as the Act does require registration statements for reselling prior issues to the public, but this is not the primary focus of the Act.

Question 12

Which of the following is one method utilized by the auditing profession to assist in maintaining independence?

Accepted Answer

Partner rotation on public engagements every five years is a method utilized by the auditing profession to assist in maintaining independence. This helps in preventing the auditors from developing strong personal relationships with the client and becoming too comfortable with them, which can compromise their independence. Option A is also a valid method to maintain independence but it is not the best answer as it is a common requirement for most professions to keep up-to-date with relevant knowledge. Option B and D are invalid as they do not correctly represent the methods used to maintain independence in auditing.

Question 13

The primary objective of the Securities Act of 1933 is the regulation of which of the following?

Accepted Answer

The primary objective of the Securities Act of 1933 is to regulate the initial issuance of securities, which includes ensuring that all relevant information is disclosed to potential investors so they can make informed decisions.

None of the other answer choices are correct. The trading of securities after their initial issuance falls under the regulation of the Securities Exchange Act of 1934. Adherence to the Sarbanes-Oxley Act of 2002 is a separate issue related to corporate governance and financial reporting. The registration of audit firms with the PCAOB is also a separate issue related to the oversight of auditors of publicly traded companies.

Question 14

An example of a case that subjected an auditor to criminal charges is

Accepted Answer

The Equity Funding case involved fraudulent financial reporting, and auditors were charged with criminal negligence for failing to detect the fraud.

Question 15

Which of the following most likely constitutes breach of contract of the auditor with a client?

Accepted Answer

Withdrawing from an engagement due to accepting a new client could constitute a breach of contract if it violates the terms agreed upon with the original client, such as completing the audit or providing services for a specified period.

Question 16

When the client and the auditor are both sued and judgment is rendered against both,the auditor will be required to settle the entire judgment if the client is bankrupt.Which of the following is a representation of the above?

Accepted Answer

Joint and several liability statutes hold both the client and the auditor responsible for any damages resulting from the audit, and if the client is bankrupt, the auditor will have to settle the full judgment.

Question 17

The law that requires companies to file registration statements with the SEC before they may issue new securities to the public is known as the

Accepted Answer

The law that requires companies to file registration statements with the SEC before they may issue new securities to the public is known as the Securities Act of 1933. The Securities Exchange Act of 1934 regulates trading in the secondary securities markets and contains various provisions relating to reporting and disclosure obligations of public companies. RICO law refers to the Racketeer Influenced and Corrupt Organizations Act, which deals with crimes committed through organized crime. The Securities Act of 1934 does not require registration statements for the issue of new securities; rather, it regulates the secondary market trading of those securities.

Question 18

The audit firm must prepare to minimize exposure against litigation and regulatory investigation.Which of the following represents the best method of performing this task?

Accepted Answer

Instituting a sound system of quality control within the firm is the best method to prepare for minimizing exposure against litigation and regulatory investigation. This will ensure that the audit firm follows appropriate standards and procedures, and can demonstrate its compliance with these standards in case of an investigation or litigation. Engaging competent and trustworthy criminal defense attorneys may be necessary in specific cases, but it is not a general method to prepare for minimizing exposure. Lobbying the SEC to become allies with CPAs and related constituents may not be feasible or effective. Restructuring to a traditional partnership to share the risk with other professionals is not a reliable way to prepare for minimizing exposure, as partners in a traditional partnership can still face personal liability.

Question 19

The court case that established the precedent that an auditor can be held liable to third parties for fraud and gross negligence,but limited auditor liability for ordinary negligence to those who are in privity of contract,is the

Accepted Answer

The Ultramares Corporation case established the precedent that an auditor can be held liable to third parties for fraud and gross negligence, but limited auditor liability for ordinary negligence to those who are in privity of contract.

Question 20

The Securities Exchange Act of 1934 places the burden of proof on which of the following parties?

Accepted Answer

The Securities Exchange Act of 1934 places the burden of proof on the third-party plaintiff, who must demonstrate that the defendant made a false or misleading statement and that they relied on it to their detriment.

Quiz 17: Professional Liability