Question 1

Discuss how SEC rules affect the legal and the ethical relationship between accountants and the companies they audit.

Accepted Answer

The SEC rules require accountants to maintain independence from their clients.The accountant must be able to exercise objective and impartial judgment on all issues.One way to ensure this is by forbidding an auditor or the auditor's family from maintaining a financial or business relationship with the client.Specifically,the SEC rules prohibit accountants or their families from owning stock in a company that their firm audits.SEC rules of practice say that an accountant who engages in unethical or improper professional conduct may be banned from practice before the SEC.Banned or suspended auditors cannot perform the audits required by the 1933 and 1934 Securities Acts.

Question 2

Discuss the advantages and disadvantages of using IFRS.

Accepted Answer

As businesses become more international,using IFRS,or international financial reporting standards,would make cross-country comparisons easier.Worldwide consistency would be possible.Foreign companies might be more willing to invest in the United States if they could use international accounting rules.A disadvantage is that some IFRS standards are weaker than the GAAP standards.Also,some experts fear allowing use of IFRS would amount to outsourcing financial safety standards.

Question 3

Which of the following opinions indicates that the company's financial statements fairly present its financial condition according to GAAP?

Accepted Answer

A)  Qualified opinion. 
B)  Adverse opinion. 
C)  Disclaimer of opinion. 
D)  Unqualified opinion. 
A)  Qualified opinion. 
B)  Adverse opinion. 
C)  Disclaimer of opinion. 
D)  Unqualified opinion. D

Question 4

John is auditing MegaCorp.He finds an accounts payable for 1,000 reams of photocopy paper.He checks to make sure the paper actually arrived and that the receiving department had signed and dated the invoice.He also checks the original purchase order to make sure the purchase was properly authorized.This illustrates:

Accepted Answer

A)  tracing. 
B)  vouching. 
C)  following. 
D)  monitoring. 
A)  tracing. 
B)  vouching. 
C)  following. 
D)  monitoring.

Question 5

Great State Bank claimed that Wiles Accounting committed fraud in the preparation of an audit.To hold the accounting firm liable,which of the following elements must be established?

Accepted Answer

A)  Knowledge or reckless disregard of the truth. 
B)  A fiduciary relationship. 
C)  Failure to exercise due care. 
D)  An executed engagement letter. 
A)  Knowledge or reckless disregard of the truth. 
B)  A fiduciary relationship. 
C)  Failure to exercise due care. 
D)  An executed engagement letter.

Question 6

An engagement letter is a written contract:

Accepted Answer

A)  between an accountant and client. 
B)  in anticipation of marriage. 
C)  between a corporation and the AICPA. 
D)  intended to create a fiduciary duty of an accountant to his client. 
A)  between an accountant and client. 
B)  in anticipation of marriage. 
C)  between a corporation and the AICPA. 
D)  intended to create a fiduciary duty of an accountant to his client.

Question 7

Nancy is an auditor.She works in a state that uses the Ultramares Doctrine.She fraudulently prepared financial documents for her client,Star,Inc.Her client presented the information to Moonglow,Inc.Moonglow was a potential creditor of Star,Inc.,and was seriously damaged by the fraudulent financial information.Moonglow sued Nancy.She claims she is not liable to Moonglow,a third party,since she was not provided with its name at the time the audit was prepared.Is she liable to Moonglow? Explain.

Accepted Answer

Yes.Any time an accountant or auditor co

Question 8

After completing an audit,the most unfavorable opinion an auditor can issue is a disclaimer of opinion.

Accepted Answer

A) True 
 B)False

Question 9

Ralco was preparing Heidi's tax return.In confidence,Heidi revealed some information to Ralco.Under the federal accountant-client privilege,the information Heidi disclosed is protected from disclosure in a criminal action by the U.S.government.

Accepted Answer

A) True 
 B)False

Question 10

GBH,an accounting firm,was hired to prepare financial statements for E-treme.Great State Bank has asked to see GBH's working papers.Great State Bank is thinking about extending a $4 million line of credit to E-treme.GBH:

Accepted Answer

A)  can show the bank the working papers because Great State Bank has a proper purpose. 
B)  can show the bank the working papers because Great State Bank is a known third party. 
C)  cannot show the bank the working papers under any circumstances as they are not finalized. 
D)  cannot show the bank the working papers unless E-treme gives permission. 
A)  can show the bank the working papers because Great State Bank has a proper purpose. 
B)  can show the bank the working papers because Great State Bank is a known third party. 
C)  cannot show the bank the working papers under any circumstances as they are not finalized. 
D)  cannot show the bank the working papers unless E-treme gives permission.

Question 11

GBH,an accounting firm,was hired to prepare financial statements for E-treme.GBH:

Accepted Answer

A)  cannot show the working papers to E-treme unless there is a valid court order. 
B)  cannot show the working papers to E-treme unless it obtains permission from the AICPA. 
C)  can show the working papers to anyone that asks, since the accountant owns them. 
D)  must allow E-treme access to the working papers. 
A)  cannot show the working papers to E-treme unless there is a valid court order. 
B)  cannot show the working papers to E-treme unless it obtains permission from the AICPA. 
C)  can show the working papers to anyone that asks, since the accountant owns them. 
D)  must allow E-treme access to the working papers.

Question 12

Ron is an accountant who was contacted by Zebra Toy Company to prepare financial statements.Zebra Toy Company told Ron that it wished to present these documents to Lion Wholesalers,Inc.,a large supplier of toys.If Lion is convinced that Zebra Toy Company is financially solid,it will issue Zebra a large line of credit.
After Ron prepares the financial documents,Zebra presents the information to Lion Wholesalers and also to Tiger Toy Company,another wholesaler of toys.Zebra wishes to obtain a line of credit from Tiger as well as from Lion.If Ron committed a serious error by overstating Zebra Toy Company's financial soundness and the two creditors,Lion and Tiger,are damaged as a result,can these third parties recover damages from Ron? Explain.

Accepted Answer

The answer depends on what rule the stat

Question 13

Teresa is suing her accountant for fraud.To win,Teresa must show that she justifiably relied on the accountant's fraudulent statement.

Accepted Answer

A) True 
 B)False

Question 14

The accounting firm of Griggs,Macon,and Fiurre audits the financial records of Chasse Co.The Sarbanes-Oxley Act prohibits the accounting firm from providing consulting services to Chasse on human resource matters.

Accepted Answer

A) True 
 B)False

Question 15

Under the UCC,contracts between accountants and their clients must be in writing.

Accepted Answer

A) True 
 B)False

Question 16

Adam claimed that N & A,its accounting firm,negligently prepared an audit.To hold the accounting firm liable,which of the following elements must be established?

Accepted Answer

A)  Scienter or guilty knowledge. 
B)  A fiduciary relationship. 
C)  Failure to exercise due care. 
D)  An executed engagement letter. 
A)  Scienter or guilty knowledge. 
B)  A fiduciary relationship. 
C)  Failure to exercise due care. 
D)  An executed engagement letter.

Question 17

Fast Auditors prepared audited financial statements for Mega Company's registration statement in compliance with the 1933 Securities Act.John bought stock in Mega Company.It was discovered that the financial statements prepared for the registration statement contained some important omissions.John sued Fast Auditors to recover his investment when Mega Company turned out to be a bad investment.What must John prove to recover from Fast Auditors?

Accepted Answer

To prevail under Section 11 of

Question 18

Criminal liability for accountants:

Accepted Answer

A)  is not an option under securities law; there is only civil liability. 
B)  is possible under the Securities Act of 1933, the 1934 Act, state securities laws, and the Internal Revenue Code. 
C)  may result in fines but not imprisonment from violation of the federal securities laws. 
D)  will result from violation of the accountant-client privilege under federal law. 
A)  is not an option under securities law; there is only civil liability. 
B)  is possible under the Securities Act of 1933, the 1934 Act, state securities laws, and the Internal Revenue Code. 
C)  may result in fines but not imprisonment from violation of the federal securities laws. 
D)  will result from violation of the accountant-client privilege under federal law.

Question 19

Under the amended Securities Exchange Act of 1934,accountants are liable jointly and severally whether or not they knew they were violating the law.

Accepted Answer

A) True 
 B)False

Question 20

An accountant is liable for fraud to:

Accepted Answer

A)  only her client. 
B)  only her client and any known user of her information. 
C)  any foreseeable user of her work product who justifiably relied on it. 
D)  any third party who used the information contained in her work product. 
A)  only her client. 
B)  only her client and any known user of her information. 
C)  any foreseeable user of her work product who justifiably relied on it. 
D)  any third party who used the information contained in her work product.

Exam 27: Accountants' Liability

Discuss how SEC rules affect the legal and the ethical relationship between accountants and the companies they audit.

Discuss the advantages and disadvantages of using IFRS.

Which of the following opinions indicates that the company's financial statements fairly present its financial condition according to GAAP?

Great State Bank claimed that Wiles Accounting committed fraud in the preparation of an audit.To hold the accounting firm liable,which of the following elements must be established?

An engagement letter is a written contract:

After completing an audit,the most unfavorable opinion an auditor can issue is a disclaimer of opinion.

Ralco was preparing Heidi's tax return.In confidence,Heidi revealed some information to Ralco.Under the federal accountant-client privilege,the information Heidi disclosed is protected from disclosure in a criminal action by the U.S.government.

GBH,an accounting firm,was hired to prepare financial statements for E-treme.Great State Bank has asked to see GBH's working papers.Great State Bank is thinking about extending a $4 million line of credit to E-treme.GBH:

GBH,an accounting firm,was hired to prepare financial statements for E-treme.GBH:

Teresa is suing her accountant for fraud.To win,Teresa must show that she justifiably relied on the accountant's fraudulent statement.

The accounting firm of Griggs,Macon,and Fiurre audits the financial records of Chasse Co.The Sarbanes-Oxley Act prohibits the accounting firm from providing consulting services to Chasse on human resource matters.

Under the UCC,contracts between accountants and their clients must be in writing.

Adam claimed that N & A,its accounting firm,negligently prepared an audit.To hold the accounting firm liable,which of the following elements must be established?

Criminal liability for accountants:

Under the amended Securities Exchange Act of 1934,accountants are liable jointly and severally whether or not they knew they were violating the law.

An accountant is liable for fraud to:

Introduction To Law

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