Deck 5: Legal Liability

Question 1

Accountants are not subject to prosecution under Bill C-22, known informally as the
"proceeds of crime" legislation.

Answer 1

False

Question 2

Auditors are increasingly obligated to report illegal acts to third parties outside the company in which they occurred.

Answer 2

True

Question 3

In the London vs.General Bank (1895) case, it was held that the auditor takes complete responsibility for detecting fraud in a set of financial statements they are auditing.

Answer 3

False

Question 4

Due professional care implies that the practitioner is conducting his/her work to the highest possible standard and will make no errors.

Question 5

Under common law the plaintiff in a tort action against an accountant must prove that the accountant was negligent, grossly negligent, fraudulent, or otherwise responsible for the damages claimed.

Question 6

A defendant accountant will likely first try to argue that it had no privity relationship with the plaintiff.

Question 7

The Securities and Exchange Commission in the U.S.will hold a negligent auditor liable under common law.

Question 8

To prove due diligence as a defence under Bill 198, auditors need to document their work in the audit file.

Question 9

A plaintiff, who is a normal trade creditor, can collect damages under common law for negligence from the corporation's auditors.

Question 10

Primary beneficiaries are third parties who have paid to have an audit performed.

Question 11

Due professional care occurs when an auditor observes all the rules of conduct for the profession and applies all the standards of the profession.

Question 12

Constructive fraud is characterized by an intentional act designed to deceive, mislead or injure the rights of another person.

Question 13

Accountants can be liable for civil damages and criminal penalties for failure to perform professional services properly.

Question 14

Which of the following statements represents an audit failure?

A)A client goes bankrupt or has serious financial difficulty.
B)An auditor failed to conduct an audit in accordance with GAAS.
C)An auditor cannot collect the audit fees from the client.
D)An auditor is sued by a third party.

Question 15

In a common law action against accountant all that a plaintiff must prove is that the accountant was negligent, grossly negligent, fraudulent, or otherwise responsible for the damages claimed.

Question 16

A breach of contract suit is a claim that could be brought by a client against an accountant that accounting services were not performed in the manner agreed upon.

Question 17

Accountants are not liable for misstatements in compilation or review engagements.

Question 18

Under common law, a plaintiff who is owed a legal duty of care must prove reliance on misleading statements and damages suffered because of that reliance.

Question 19

The OSC in Canada has powers to decide GAAP similar to the SEC in the United States.

Question 20

The purpose of Bill C-25, known as the "proceeds of crime" legislation, is to ensure that accountants disclose all suspected cases of money laundering to law officers.

Question 21

During a review engagement, CA discovers that the gross margin has increased by 20% over the last few years.To avoid potential liability due to possibly misstated financial statements, CA should

A)Correct the gross margin to be consistent with prior years.
B)Obtain additional information to correct or substantiate the figures.
C)No additional work is required for review engagements.
D)Downgrade the assignment to a compilation engagement.

Question 22

While conducting an audit, Larson & Larson Chartered Accountants failed to detect a material misstatement in its client's financial statements.Larson's unqualified opinion was included with the financial statements in a prospectus for a public offering of securities made by the client.Larson knew that its opinion and the financial statements would be used for this purpose.Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities?

A)The purchaser must prove that Larson was negligent in conducting the audit.
B)The purchaser must prove that Larson knew of the material misstatements.
C)Larson will not be liable if they had reasonable grounds to believe the financial statements were accurate.
D)Larson will be liable unless the purchaser did not rely on the financial statements.

Question 23

Under the common law, in a law suit concerning auditor liability, the primary beneficiary is

A)The recipient of funds when someone dies.
B)A party for whose benefit the audit or service is being performed.
C)The client.
D)The shareholders of the company.

Question 24

The CBCA is important to auditors in Canada because it.

A)Regulates trading in securities.
B)Approves and guarantees investments.
C)Indentifies auditors' rights and responsibilities.
D)Regulates the accounting profession.

Question 25

The lessons for accountants that are inherent in the 1136 Tenants' Corporation v.Rothenberg case include all of the following except

A)Engagement letters are as essential for accounting engagements as they are for audit engagements.
B)Regardless of the nature of the engagement, a public accountant should be alert for and should follow up on any unusual items such as missing invoices.
C)Accountants should clearly communicate the extent of their association with financial information.
D)Public accountants cannot be held liable to third parties in non-audit or review engagements.

Question 26

Under common law, which of the following statements most accurately reflects the liability of a CA who gives a fraudulent opinion on an audit of a client's financial statements?

A)The CA is liable only to third parties who are in privity of contract with the CA.
B)The CA is liable only to known users of the financial statements.
C)The CA probably is liable to any person who suffered a loss as a result of the fraud.
D)The CA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

Question 27

Third-party plaintiffs bringing action under common law need not prove

A)They were damaged or suffered a loss.
B)Reliance on the financial statements.
C)The financial statements were direct cause of loss.
D)Breach of contract.

Question 28

You have just acquired a new client and have discussed various services that you will perform for the client including the annual audit and preparation of corporate tax returns.What documentation should you obtain from the client in order to reduce any misunderstandings over the type of services being performed?

A)Management letter.
B)Auditor's report
C)Legal letter
D)Engagement letter.

Question 29

An important criterion enshrined in law that requires corporations to prepare their financial statements in accordance with GAAP is the

A)Canada Business Corporations Act requirement that financial statements be prepared in accordance with accounting standards outlined in the CICA Handbook.
B)Ontario Securities Commission requirement that financial statements be accurate.
C)Ontario Business Corporations Act requirement that all businesses have audits.
D)Federal legislation requiring unqualified audit reports for public companies.

Question 30

Which of the following is not an element of a successful negligence action against auditors?

A)There must be proof that damage resulted.
B)The plaintiff must be a known user of the financial statements.
C)There must be a legal duty of care to the plaintiff.
D)There must be a reasonable connection between the breach of duty of care and resulting losses.

Question 31

When referring to public accountants, what does breach of contract mean?

A)A lawsuit involving a client and an auditor
B)Services were not performed as agreed
C)Auditor bills clients for extra services
D)There is no engagement letter signed by the client

Question 32

While conducting an audit, Larson Associates CAs failed to detect a material misstatement in its client's financial statements.Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client.Larson knew that its opinion and the financial statements would be used for this purpose.In a suit by a purchaser against Larson for common law negligence, Larson's best defence would be that the

A)Audit was conducted in accordance with generally accepted auditing standards.
B)Client was aware of the misstatements.
C)Purchaser was not in privity of contract with Larson.
D)Identity of the purchaser was not known to Larson at the time of the audit.

Question 33

When an auditor is found guilty of a fraudulent misrepresentation there is liability owed to

A)Third parties with privity and contracted parties.
B)Any party that suffered a loss.
C)Shareholders only.
D)All parties with privity.

Question 34

Foreseeable third parties are best described as

A)Management of the company.
B)Those that have direct involvement through a contract.
C)Those third parties who will rely on the audit and are specifically known by the auditor.
D)Those third parties who potentially will rely on the audit but are not specifically known by the auditor.

Question 35

In a common law action against an accountant, lack of privity is a viable defence if the plaintiff

A)Is the client's creditor who sues the accountant for negligence.
B)Can prove the presence of gross negligence that amounts to a reckless disregard for the truth.
C)Is the accountant's client.
D)Bases the action upon fraud.

Question 36

An important case that limits the auditor's liability to those third parties of which the auditor had knowledge was

A)Dupuis v.Pan American Mines.
B)Hedley Byrne & Co.Ltd.V.Heller & Partners Ltd.
C)Caparo Industries PLC v.Pickman et al.
D)Haig v.Bamford et al.

Question 37

Which of the following elements, if present, would support a finding of constructive fraud on the part of a CA?

A)Gross negligence in applying generally accepted auditing standards.
B)Ordinary negligence in applying generally accepted accounting principles.
C)Identified third party users.
D)Scienter.

Question 38

A CA may be liable to any purchaser of a security if the CA issued a clean opinion on materially misstated financial statements.CA usually will not be liable to the purchaser

A)If the purchaser is guilty of contributory negligence.
B)If the CA can prove due care in the audit.
C)Unless the purchaser can prove privity with the CA.
D)Unless the purchaser can prove scienter on the part of the CA.

Question 39

Beckler & Associates CAs issued an unqualified opinion on the financial statements of Queen Ltd.The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth.Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen.Beckler knew that the financial statements would be provided to Mac.Queen defaulted on the loan.Mac sued Beckler to recover the losses associated with Queen's default.Which of the following must Mac prove in order to recover?
I)Beckler was negligent in conducting the audit.II.Mac relied on the financial statements.

A)I only.
B)II only.
C)Both I and II.
D)Neither I nor II.

Question 40

Sun Corp.approved a merger plan with Cord Corp.One of the factors that led to the approval of the merger was the fact that the Cord's financial statements were audited by Frank
& Co.CAs.Sun had engaged Frank to audit Cord's financial statements.While performing the audit, Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses.For the lawsuit to be successful, Sun must prove that Frank & Co., CAs

A)Knew of the irregularities.
B)Failed to exercise due care.
C)Was grossly negligent.
D)Acted with scienter.

Question 41

In the Lac Minerals v.Corona Resources, which was one of the three factors to consider in determining if a fiduciary duty exists?

A)A contract relationship exists between an accountant acting as a fiduciary and a client.
B)An accountant acting as fiduciary owed a duty of care to the client.
C)An accountant acting as fiduciary has scope for the exercise of some discretion or power.
D)An accountant acting as fiduciary is required to issue a report.

Question 42

What does a tort refer to?

Question 43

Negligence is the failure to perform a duty with the requisite standard of care.What are the four elements of negligence and what would be an auditor's defense against them?

Question 44

Who would be considered a reasonably foreseeable third party for an auditor?