Question 1

The accountant is the legal owner of working papers after an audit.

Accepted Answer

A) True 
 B)False  True

Question 2

Under the ________,an accountant is liable to known third-party users of the accountant's work product and also to those in the limited class whose reliance on the work the accountant specifically foresaw.

Accepted Answer

A) Carroll rule 
B) Reliance rule 
C) Ultramares rule 
D) Class test 
E) Restatement test 
A) Carroll rule 
B) Reliance rule 
C) Ultramares rule 
D) Class test 
E) Restatement test E

Question 3

What is Norah's contract with Joel to do audit work for him called?

Accepted Answer

A) Audit affirmation letter 
B) Absolute contract 
C) Retention contract 
D) Preview contract 
E) Engagement letter 
A) Audit affirmation letter 
B) Absolute contract 
C) Retention contract 
D) Preview contract 
E) Engagement letter E

Question 4

When an audit is complete,an accountant usually issues a[n] ________ letter stating his or her assessment of the company that was audited.

Accepted Answer

A) Opinion 
B) Responsive 
C) Accounting 
D) Disclaimer 
E) Auditing 
A) Opinion 
B) Responsive 
C) Accounting 
D) Disclaimer 
E) Auditing

Question 5

Luca,a newly licensed certified public accountant,performed an audit for ABC Corporation.Shortly after the audit,a number of company officials were indicted for fraud.Luca tells his boss,Olivia,that he is not concerned because he had no duty under GAAS or GAAP to detect fraud and that so long as those obligations were met,he had no duty to do more.He says that auditors are not expected to have perfect judgment.Set forth what the initials GAAS and GAAP represent.Additionally,discuss whether Luca is correct on the following issues,and why or why not:
1.His contention regarding compliance with GAAS and GAAP completely satisfying auditing obligations.
2.His contention regarding the obligation of auditors in relation to fraud.
3.His contention that auditors are not required to have perfect judgment.

Accepted Answer

GAAP stands for generally accepted accou

Question 6

What must a plaintiff show in order to establish a violation of Section 20a)of the Securities Exchange Act?

Accepted Answer

Under Section 20a),to establish liabilit

Question 7

State protection of an accountant-client privilege does not apply when a federal law is at issue.

Accepted Answer

A) True 
 B)False

Question 8

Under which of the following tests is an accountant held liable to any third-party that was or should have been foreseen as a possible user of the accountant's work product and that,in fact,did use and rely upon that work product for a proper business purpose?

Accepted Answer

A) The Privity Test 
B) The Restatement Test 
C) The Ultramares Rule 
D) The Reasonably Foreseeable Users Test 
E) The Near Privity Test 
A) The Privity Test 
B) The Restatement Test 
C) The Ultramares Rule 
D) The Reasonably Foreseeable Users Test 
E) The Near Privity Test

Question 9

Does the attorney-client privilege apply to accountants?

Accepted Answer

A) Yes,but only if the accountant is also an attorney. 
B) Yes,all communication between accountant and client is protected by the attorney-client privilege. 
C) No,because accountants have the accountant-client privilege. 
D) No,because attorneys do not need accountants in order to represent their client. 
E) Yes,if the communication between accountant and client is made in confidence for the purpose of obtaining legal advice from the attorney. 
A) Yes,but only if the accountant is also an attorney. 
B) Yes,all communication between accountant and client is protected by the attorney-client privilege. 
C) No,because accountants have the accountant-client privilege. 
D) No,because attorneys do not need accountants in order to represent their client. 
E) Yes,if the communication between accountant and client is made in confidence for the purpose of obtaining legal advice from the attorney.

Question 10

Which section of the Securities Act makes accountants civilly liable for misstatements and omissions of material facts made in the registration statements required by the SEC?

Accepted Answer

A) Section 12 of the Securities Act of 1933 
B) Section 12 of the Securities Act of 1934 
C) Section 13 of the Securities Act of 1935 
D) Section 11 of the Securities Act of 1933 
E) Section 10 of the Securities Act of 1934 
A) Section 12 of the Securities Act of 1933 
B) Section 12 of the Securities Act of 1934 
C) Section 13 of the Securities Act of 1935 
D) Section 11 of the Securities Act of 1933 
E) Section 10 of the Securities Act of 1934

Question 11

Javier claims that he should not be liable for negligence because Sami committed fraud.Is he correct?

Accepted Answer

A) No,but only if he violated a statute. 
B) Yes,because he was not aware of Sami's conduct. 
C) No,because he failed to detect fraud that a normal audit would have uncovered. 
D) Yes. 
E) Yes,because Sami's conduct was not reasonably foreseeable. 
A) No,but only if he violated a statute. 
B) Yes,because he was not aware of Sami's conduct. 
C) No,because he failed to detect fraud that a normal audit would have uncovered. 
D) Yes. 
E) Yes,because Sami's conduct was not reasonably foreseeable.

Question 12

Does Javier's disclaimer in his opinion letter protect him from liability?

Accepted Answer

A) Yes,as long as the disclaimer was part of the opinion letter. 
B) Yes,because a qualification will limit liability. 
C) No,because the disclaimer is broad and general. 
D) Yes,but only if he properly applied GAAP and GAAS. 
E) Yes,because a disclaimer protects an accountant from liability based on failure to detect fraud. 
A) Yes,as long as the disclaimer was part of the opinion letter. 
B) Yes,because a qualification will limit liability. 
C) No,because the disclaimer is broad and general. 
D) Yes,but only if he properly applied GAAP and GAAS. 
E) Yes,because a disclaimer protects an accountant from liability based on failure to detect fraud.

Question 13

Under the Restatement Test,referenced in the text's discussion of the case Bily v.Arthur Young & Co. ,which of the following is true regarding the effort by Bank XYZ to recover against Amina based upon Maggie's default?

Accepted Answer

A) The bank will be able to recover because it was in privity with Maggie,and Maggie was in privity with Amina. 
B) The bank will not be able to recover because it cannot establish reliance upon Amina's work. 
C) The bank will be able to recover because it was in privity with Amina. 
D) The bank will be able to recover because Amina was aware that her audit would be used to obtain a loan. 
E) The bank will not be able to recover because Amina and Maggie had specifically agreed that the audit would only be used to obtain a loan from Maggie's uncle. 
A) The bank will be able to recover because it was in privity with Maggie,and Maggie was in privity with Amina. 
B) The bank will not be able to recover because it cannot establish reliance upon Amina's work. 
C) The bank will be able to recover because it was in privity with Amina. 
D) The bank will be able to recover because Amina was aware that her audit would be used to obtain a loan. 
E) The bank will not be able to recover because Amina and Maggie had specifically agreed that the audit would only be used to obtain a loan from Maggie's uncle.

Question 14

Which of the following is true regarding states that have adopted the reasonably foreseeable users test for accountant liability to third-parties?

Accepted Answer

A) Very few states have adopted it. 
B) All states have adopted it. 
C) Three-quarters of the states have adopted it. 
D) All 50 states have rejected it although it is the proposed rule under the Restatement Third)of Torts. 
E) Half the states have adopted it. 
A) Very few states have adopted it. 
B) All states have adopted it. 
C) Three-quarters of the states have adopted it. 
D) All 50 states have rejected it although it is the proposed rule under the Restatement Third)of Torts. 
E) Half the states have adopted it.

Question 15

In negligence cases involving the accountant's work,which of the following is true regarding the use of working papers?

Accepted Answer

A) Working papers may be used as evidence in negligence cases only if the accountant failed to provide the client with copies of them. 
B) Working papers cannot be used as evidence in negligence cases. 
C) Working papers can be used as evidence in negligence cases only if a bank is the plaintiff. 
D) Working papers can be used as evidence in negligence cases. 
E) Working papers can be used as evidence in negligence cases only if a non-corporate plaintiff is involved. 
A) Working papers may be used as evidence in negligence cases only if the accountant failed to provide the client with copies of them. 
B) Working papers cannot be used as evidence in negligence cases. 
C) Working papers can be used as evidence in negligence cases only if a bank is the plaintiff. 
D) Working papers can be used as evidence in negligence cases. 
E) Working papers can be used as evidence in negligence cases only if a non-corporate plaintiff is involved.

Question 16

An accountant who commits fraud is liable to those parties he or she reasonably should have foreseen would be injured through a justifiable reliance upon the fraudulent information.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following would be available to Dominique,assuming that she can establish that Andrew failed to meet his contractual obligations?

Accepted Answer

A) Reasonable and foreseeable damages related to the breach and damages for fraud which would be presumed. 
B) Only a recovery for the cost of obtaining a different accountant to perform breached contractual duties. 
C) Nothing unless the contact specifically provides for damages in the event of a breach. 
D) Reasonable and foreseeable damages related to the breach excluding the cost of another accountant to perform breached contractual duties. 
E) The cost of obtaining a different accountant to perform breached contractual duties and also any reasonable and foreseeable damages related to the breach. 
A) Reasonable and foreseeable damages related to the breach and damages for fraud which would be presumed. 
B) Only a recovery for the cost of obtaining a different accountant to perform breached contractual duties. 
C) Nothing unless the contact specifically provides for damages in the event of a breach. 
D) Reasonable and foreseeable damages related to the breach excluding the cost of another accountant to perform breached contractual duties. 
E) The cost of obtaining a different accountant to perform breached contractual duties and also any reasonable and foreseeable damages related to the breach.

Question 18

Which of the following involves accountant liability to third parties based upon privity or near privity?

Accepted Answer

A) The Reliance Rule 
B) The Restatement test 
C) The Carroll Rule 
D) The Class test 
E) The Ultramares rule 
A) The Reliance Rule 
B) The Restatement test 
C) The Carroll Rule 
D) The Class test 
E) The Ultramares rule

Question 19

When an accountant is hired to perform a task,the contract the accountant enters into with a client is referred to as a[n] ________.

Accepted Answer

A) Performance letter 
B) Engagement letter 
C) Accounting and auditing agreement 
D) Procurement letter 
E) Accounting contract 
A) Performance letter 
B) Engagement letter 
C) Accounting and auditing agreement 
D) Procurement letter 
E) Accounting contract

Question 20

What is the rationale behind the Restatement Test of accountant liability to third-parties?

Accepted Answer

A) Potential investors should have a route of recovery even if they could not be foreseen by accountants. 
B) The general public should have a route of recovery even if they could not be foreseen by the accountant. 
C) It is only fair to hold accountants liable if they are in privity with a plaintiff. 
D) The economy will benefit if investors recognize that they have sufficient rights of recovery. 
E) Much of what accountants do is prepare work for parties that are not their clients and therefore,it makes sense for accountants to owe a duty to intended receivers. 
A) Potential investors should have a route of recovery even if they could not be foreseen by accountants. 
B) The general public should have a route of recovery even if they could not be foreseen by the accountant. 
C) It is only fair to hold accountants liable if they are in privity with a plaintiff. 
D) The economy will benefit if investors recognize that they have sufficient rights of recovery. 
E) Much of what accountants do is prepare work for parties that are not their clients and therefore,it makes sense for accountants to owe a duty to intended receivers.

Exam 11: Liability of Accountants and Other Professionals

The accountant is the legal owner of working papers after an audit.

Under the ________,an accountant is liable to known third-party users of the accountant's work product and also to those in the limited class whose reliance on the work the accountant specifically foresaw.

What is Norah's contract with Joel to do audit work for him called?

When an audit is complete,an accountant usually issues a[n] ________ letter stating his or her assessment of the company that was audited.

What must a plaintiff show in order to establish a violation of Section 20a)of the Securities Exchange Act?

State protection of an accountant-client privilege does not apply when a federal law is at issue.

Under which of the following tests is an accountant held liable to any third-party that was or should have been foreseen as a possible user of the accountant's work product and that,in fact,did use and rely upon that work product for a proper business purpose?

Does the attorney-client privilege apply to accountants?

Which section of the Securities Act makes accountants civilly liable for misstatements and omissions of material facts made in the registration statements required by the SEC?

Javier claims that he should not be liable for negligence because Sami committed fraud.Is he correct?

Does Javier's disclaimer in his opinion letter protect him from liability?

Under the Restatement Test,referenced in the text's discussion of the case Bily v.Arthur Young & Co. ,which of the following is true regarding the effort by Bank XYZ to recover against Amina based upon Maggie's default?

Which of the following is true regarding states that have adopted the reasonably foreseeable users test for accountant liability to third-parties?

In negligence cases involving the accountant's work,which of the following is true regarding the use of working papers?

An accountant who commits fraud is liable to those parties he or she reasonably should have foreseen would be injured through a justifiable reliance upon the fraudulent information.

Which of the following would be available to Dominique,assuming that she can establish that Andrew failed to meet his contractual obligations?

Which of the following involves accountant liability to third parties based upon privity or near privity?

When an accountant is hired to perform a task,the contract the accountant enters into with a client is referred to as a[n] ________.

What is the rationale behind the Restatement Test of accountant liability to third-parties?

An Introduction to Dynamic Business Law

Business Ethics

The Uslegal System

Alternative Dispute Resolution

Constitutional Principles

International and Comparative Law

Crime and the Business Community

Tort Law

Negligence and Strict Liability

Product Liability

Intellectual Property

Introduction to Contracts

Agreement

Consideration

Capacity and Legality

Legal Assent

Contracts in Writing

Third-Party Rights to Contracts

Discharge and Remedies

Introduction to Sales and Lease Contracts

Title,risk of Loss,and Insurable Interest

Performance and Obligations Under Sales and Leases

Remedies for Breach of Sales and Lease Contracts

Warranties

Negotiable Instruments: Negotiability and Transferability

Negotiation, holder in Due Course, and Defenses

Liability, defenses, and Discharge

Checks and Electronic Fund Transfers

Secured Transactions

Other Creditors Remedies and Suretyship

Bankruptcy and Reorganization

Agency Formation and Duties

Liability to Third Parties and Termination

Forms of Business Organization

Partnerships: Nature, formation, and Operation

Partnerships: Termination and Limited Partnerships

Corporations: Formation and Financing

Corporations: Directors, officers, and Shareholders

Corporations: Mergers, consolidations, terminations

Corporations: Securities and Investor Protection

Employment and Labor Law

Employment Discrimination

Administrative Law

Consumer Law

Environmental Law

Antitrust Law

The Nature of Property, personal Property, and Bailments

Real Property

Landlord-Tenant Law

Insurance Law

Wills and Trusts

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