Deck 40: Accountants' Liability

Question 1

A company that receives an opinion other than an unqualified opinion may not be able to sell its securities to the public,merge with another company,or obtain loans from banks.

Answer 1

True

Question 2

An accountant's failure to follow GAASs when conducting audits constitutes a felony.

Answer 2

False

Question 3

Certified public accountants must comply with generally accepted auditing standards.

Answer 3

True

Question 4

An auditor's opinion may be conditional,unconditional,or reserved.

Question 5

Generally accepted auditing standards are standards for the preparation and presentation of financial statements.

Question 6

A disclaimer of opinion expresses the auditor's inability to draw a conclusion about the accuracy of the company's financial records.

Question 7

A disclaimer of opinion is generally issued when the auditor lacks sufficient information about the financial records to issue an overall opinion.

Question 8

In a limited liability partnership,all of the partners are limited partners who lose only their capital contribution in the LLP if the LLP fails.

Question 9

An auditor must conduct a sampling of inventory to verify the figures contained in a client's financial statements.

Question 10

An unqualified opinion represents an auditor's finding that the company's financial statements unfairly represent the company's financial position.

Question 11

The Securities and Exchange Commission permits a company to obtain an audit from either an independent certified public accountant or a certified public accountant who works for the company.

Question 12

An unqualified opinion is the least favorable opinion an auditor can give.

Question 13

Most public accounting firms are organized and operated as general partnerships.

Question 14

An adverse opinion determines that the company's financial statements do not fairly represent the company's financial position,results of operations,or change in cash flows in conformity with GAAPs.

Question 15

An audit is defined as a verification of a company's books and records.

Question 16

Generally accepted accounting principles specify the methods and procedures that must be used to conduct audits.

Question 17

The term "GAASs" stands for "generally accepted accounting standards."

Question 18

A qualified opinion states that the company's financial statements are fairly represented except for,or subject to,a departure from GAAPs,a change in accounting principles,or a material uncertainty.

Question 19

Certified public accountants must comply with generally accepted accounting principles.

Question 20

Pursuant to federal securities laws,state laws,and stock exchange rules,an audit must be performed by a public accountant.

Question 21

An accountant who does not comply with GAASs when conducting an audit and thereby fails to uncover a fraud or embezzlement by an employee of the company being audited can be sued for damages arising from this negligence.

Question 22

Where an accountant has been found liable for actual or constructive fraud,the client may bring a criminal lawsuit and recover any damages proximately caused by that fraud.

Question 23

Punitive damages are not recoverable in cases of actual fraud.

Question 24

The terms of an "engagement" are specified when an accountant and a client enter into a contract.

Question 25

Accountants cannot be held liable for their negligence in preparing unaudited financial statements.

Question 26

In terms of an accountant's liability for breach of a contract with a client,courts generally consider damages to be the expenses the client incurs in securing another accountant to perform the needed services,as well as any fines or penalties incurred by the client for missed deadlines and lost opportunities.

Question 27

Constructive fraud is sometimes categorized as gross negligence.

Question 28

Constructive fraud is defined as intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damages.

Question 29

Compliance with GAAPs and GAASs automatically relieve accountants of negligence liability.

Question 30

If an audit turns up a suspicious transaction or entry,the accountant is under a duty to investigate it and to inform the client of the results of the investigation.

Question 31

Actual fraud occurs when an accountant acts with "reckless disregard" for the truth or the consequences of his or her actions.

Question 32

When an accountant performs his or her services with reckless disregard for the truth,or with reckless disregard for the consequences of his or her actions,the accountant is guilty of actual fraud.

Question 33

The landmark case that initially defined the liability of accountants to third parties was Supramares Corporation v.Goldman Sachs.

Question 34

The Ultramares doctrine is the majority rule for accountants' liability for negligence in the United States.

Question 35

There are three (3)major rule of liability that a state can adopt in determining whether an accountant is liable in negligence to third parties: (1)the Supramares doctrine; (2)Section 552 of the Restatement (Second)of Torts; and (3)the reasonableness standard.

Question 36

Either privity of contract or a privity-like relationship is required to hold an accountant liable for negligence to a third party under the "foreseeability" rule.

Question 37

In a limited liability partnership,a limited partner whose negligent or intentional conduct causes injury is not personally liable for his or her own conduct.

Question 38

In Ultramares Corporation v.Touche,the United States Supreme Court held that an accountant cannot be held liable for negligence unless the plaintiff was either in privity of contract or a privity-like relationship with the accountant.

Question 39

Limited partners are personally liable for the debts and obligations of the LLP.

Question 40

A violation of generally accepted accounting principles or generally accepted auditing standards is prima facie evidence of negligence.

Question 41

All states have enacted statutes creating an accountant-client privilege.

Question 42

Section 552 of the Restatement (Second)of Torts provides a narrower standard for holding accountants liable to third parties for negligence than under the Ultramares doctrine.

Question 43

There is no accountant-client privilege under federal law.

Question 44

Section 11(a)of the Securities Act of 1933 imposes civil liability on accountants for making misstatements or omissions of material facts in a registration statement,or for failing to find such misstatements or omissions.

Question 45

A majority of states have adopted the foreseeability standard for holding accountants liable to third parties for negligence.

Question 46

Under the foreseeability standard,an accountant's liability does not depend on his or her knowledge of the identity of either the user or the intended class of users.

Question 47

A person injured by a Racketeer Influenced and Corrupt Organizations Act violation can bring a civil action against the violator and recover treble damages,but only if the defendant has already been criminally convicted in connection with the securities fraud.

Question 48

Registered accounting firms that audit more than one hundred (100)public companies annually are subject to inspection and review by the Public Company Accounting Oversight Board (PCAOB).

Question 49

Which of the three major rules of liability that a third party may use to hold an accountant liable for negligence is determined by specific language contained in the engagement agreement entered into between the accountant and his or her client.

Question 50

In terms of the Public Company Accounting Oversight Board (PCAOB),all of its members must be certified public accountants (CPAs).

Question 51

Securities laws are exclusively under federal jurisdiction,so states do not have the authority to legislate in this area of the law.

Question 52

If an accountant engages in actual or constructive fraud,a third party that relies on the accountant's fraud and is injured thereby may bring a tort action against the accountant to recover damages.

Question 53

In order to audit a public company,a public accounting firm must register with the Public Company Accounting Oversight Board (PCAOB).

Question 54

An accountant is liable to any foreseeable user of the client's financial statements under the plausibility standard.

Question 55

Third parties usually cannot sue accountants for breach of contract,because the third parties are merely incidental beneficiaries who do not acquire any rights under the accountant-client contract.

Question 56

Pursuant to the Sarbanes-Oxley Act,if a public accounting firm audits a public company,the accounting firm may also provide bookkeeping services to the company.

Question 57

Common law provides that an accountant may be called to court to testify against his or her client.

Question 58

Under Section 552 of the Restatement (Second)of Torts,an accountant is liable for his or her negligence to any member of a limited class of intended users for whose benefit the accountant has been employed to prepare the client's financial statements or to whom the accountant knows the client will supply copies of the financial statements.

Question 59

Securities fraud falls under the definition of racketeering for the purposes of the Racketeer Influenced and Corrupt Organizations Act.

Question 60

Accountants can assert a due diligence defense under Section 11(a)of the Securities Act of 1933.

Question 61

The term "GAAPs" stands for:

A) generally accepted auditing principles.
B) generally approved auditing principles.
C) generally acknowledged appraisal principles.
D) generally accepted accounting principles.
E) generally accredited assessment principles.

Question 62

The Sarbanes-Oxley Act requires accounting firms that audit public companies to register with the Public Company Accounting Oversight Board,and these accounting firms are subject to inspection and review by the board as follows:

A) Registered accounting firms that audit more than fifty public companies per year are inspected and reviewed at least once per year.
B) Registered accounting firms that audit more than seventy-five public companies per year are inspected and reviewed at least once per year.
C) Registered accounting firms that audit less than one hundred public companies per year are inspected and reviewed at least once every five years.
D) Registered accounting firms that audit less than one hundred public companies per year are inspected and reviewed at least once every three years.
E) Registered accounting firms are required to file annual reports, but the Board only investigates and reviews an accounting company if allegations of misconduct are alleged.

Question 63

The majority of litigation against accountants results from:

A) tax preparation.
B) the preparation of opinion letters.
C) the preparation of financial statements.
D) the preparation of audits.
E) the preparation of balance sheets.

Question 64

Truth Accounting,Inc.has been retained to perform an audit for a client.In doing the Audit,it fails to discover an embezzlement that has gone on for two years by the client's chief financial officer.The reason that Truth Accounting,Inc.failed to discover the embezzlement was because the auditor was in a rush to finish due to being too busy,so she did not conduct a reasonable investigation.Soon after the audit,the embezzlement is discovered,and the client goes bankrupt.If Truth Accounting,Inc.is sued,which of the following theories of liability apply?

A) the Ultramares doctrine
B) Section 552 of the Restatement (Second) of Torts
C) negligence
D) the foreseeability standard
E) strict liability

Question 65

Which of the following pleadings and procedural requirements make it more difficult to bring class-action securities lawsuits?

A) the Securities Exchange Act of 1933
B) the Securities Exchange Act of 1934
C) the Private Securities Litigation Reform Act of 1995
D) the Tax reform Act of 1976
E) the Sarbanes Oxley Act of 2002

Question 66

Most public accounting firms are organized and operated as ________.

A) sole proprietorships
B) general partnerships
C) limited partnerships
D) "S" corporations
E) limited liability partnerships

Question 67

An accountant's failure to follow generally accepted auditing standards when performing an audit constitutes:

A) civil fraud.
B) civil misrepresentation.
C) negligence.
D) civil deceit.
E) no-fault liability.

Question 68

A(n)________ is defined as a verification of a company's books and records.

A) confirmation
B) certification
C) assurance
D) audit
E) affirmation

Question 69

Which of the following acts replaced joint and several liability with proportionate liability?

A) the Securities Exchange Act of 1933
B) the Securities Exchange Act of 1934
C) the Private Securities Litigation Reform Act of 1995
D) the Tax Reform Act of 1976
E) the Sarbanes Oxley Act of 2002

Question 70

In the case of Greenstein,Logan & Company v.Burgess Marketing,Inc.,the court evaluated Greenstein,Logan & Company's liability for inaccurate audits and said:

A) because Burgess's controller had under-accrued and underpaid the company's federal excise taxes, Burgess was responsible for the losses suffered.
B) because Greenstein, Logan had failed to comply with generally accepted accounting principles, they were deemed negligent and therefore liable for the losses.
C) because Greenstein, Logan had failed to comply with generally accepted auditing services, they were deemed negligent and therefore liable for the losses.
D) because Burgess's controller had erred and Greenstein, Logan had failed to discover the error, both were ordered to share liability for the losses.
E) only practicing certified public accountants may testify as expert witnesses against other certified public accountants, so the university professors who testified were not persuasive expert witnesses.

Question 71

The accountant's duty of care to avoid negligence is determined by which of the following standards?

A) a reasonable accountant
B) a reasonable person
C) a reasonable professional
D) a reasonable man or a reasonable woman
E) a reasonable expert

Question 72

The Public Company Accounting Oversight Board was created by:

A) the Securities Exchange Act of 1933.
B) the Securities Exchange Act of 1934.
C) the Private Securities Litigation Reform Act of 1995.
D) the Tax Reform Act of 1976.
E) the Sarbanes Oxley Act of 2002.

Question 73

Certified public accountants must comply with two (2)uniform standards of professional conduct.They are ________,which are standards for the preparation and presentation of financial statements,and ________,which specify the methods and procedures that must be used to conduct audits.

A) BAAPs; BAASs
B) CAAPs; CAASs
C) DAAPs; DAASs
D) GAAPs; GAASs
E) MAAPs; MAASs

Question 74

If a company materially misstates certain items on its financial statements,an accountant conducting an audit of the company should provide which type of opinion?

A) a qualified opinion
B) an unqualified opinion
C) an adverse opinion
D) a disclaimed opinion
E) a sanctioned opinion

Question 75

________ fraud occurs when an accountant acts with "reckless disregard" for the truth or the consequences of his or her actions.This type of fraud is sometimes categorized as gross negligence.

A) Actual
B) De facto
C) Symbolic
D) Constructive
E) Equitable

Question 76

The Public Company Accounting Oversight Board consists of ________ members appointed for ________ year terms.

A) three; three
B) three; five
C) five; five
D) five; ten
E) The exact number of members and term length vary according to need and workload.

Question 77

Section ________ of the Uniform Securities Act makes it a criminal offense for accountants and others to willfully falsify financial statements and other reports.

A) 101
B) 202
C) 303
D) 404
E) 505

Question 78

The most favorable opinion that an accountant can give is (a)n:

A) qualified opinion.
B) unqualified opinion.
C) adverse opinion.
D) disclaimed opinion.
E) sanctioned opinion.

Question 79

KMAKY is an accounting firm and has been hired to audit the books for Bike Spinners,Inc.While performing the audit,they find that although the company's financial statement fairly represents the company's position,the accounting methods the client used to arrive at the figures were not generally accepted in the accounting industry.KMAKY should provide the following opinion:

A) a qualified opinion.
B) an unqualified opinion.
C) an adverse opinion.
D) a qualified opinion, noting the problematic accounting methods.
E) an unqualified opinion, noting the problematic accounting methods.

Question 80

The Ultramares doctrine,as created by Justice Cardozo in Ultramares Corporation v.Touche,states that:

A) a third party may hold an accountant liable for negligence, but only if they have a direct contractual relationship with the accountant and/or the accounting firm.
B) a third party may hold an accountant liable for negligence when the accountant prepares a client audit he or she knows is specifically intended for use by the third party.
C) a third party may hold an accountant liable for negligence when the accountant prepares an audit for his or her client, regardless of whether the accountant knows the audit is specifically intended for use by the third party.
D) a third party may hold an accountant liable for negligence, but only if the engagement agreement with the client contains a general release stating that the client may use the audit for whatever purposes the client wishes.
E) contractual relationships and knowledge of use or intended use are irrelevant issues, because an accountant and/or accounting firm, as professionals, will be liable for any damages caused by their negligence, whether foreseeable or not.