Deck 40: Accountants' Duties and Liability

Question 1

A formal entrance into a contract between a client and an accountant is known as an ________.

A) abatement
B) arraignment
C) easement
D) engagement

Answer 1

D

Question 2

Which of the following statements is true of accountants?

A) Accountants cannot be hired to perform nonaudit services.
B) Accountants cannot be held liable by provisions of common law.
C) Accountants can be held liable to clients but not to third parties.
D) Accountants who lack CPA certification are called public accountants.

Answer 2

D

Question 3

Which of the following statements is true of the generally accepted accounting principles (GAAPs)?

A) They are used by auditors as a guide for their nonaudit services only.
B) They are the accepted form of accounting principles around the world.
C) They cannot be modified once established by the American Institute of Certified Public Accountants.
D) They set rules for how corporations must set forth their accounts on their financial statements.

Answer 3

D

Question 4

Which of the following opinions is necessary for a company to avoid unfavorable repercussions?

A) an adverse opinion
B) a qualified opinion
C) a disclaimer of opinion
D) an unqualified opinion

Question 5

Most public accounting firms in the United States are organized and operated as ________.

A) limited liability partnerships
B) corporations
C) cooperatives
D) sole traders

Question 6

Which of the following opinions would an auditor render about a company that has materially misstated certain items on its financial statements?

A) an unqualified opinion
B) an adverse opinion
C) a qualified opinion
D) a disclaimer of opinion

Question 7

An auditor's opinion that a company's financial statements fairly represent the company's financial position,the results of its operations,and the change in cash flows for the period under audit,in conformity with generally accepted accounting principles is referred to as a(n)________.

A) disclaimer of opinion
B) adverse opinion
C) qualified opinion
D) unqualified opinion

Question 8

________ specify the methods and procedures that are to be used by public accountants when conducting external audits of company financial statements.

A) Generally accepted accounting principles (GAAPs)
B) Generally accepted auditing standards (GAASs)
C) Auditor's expert opinions
D) General engagements and agreements

Question 9

Which of the following statements is true about an audit?

A) Only an independent CPA must perform an audit.
B) An auditor may use the accounting standards defined by his or her accounting firm to perform an audit.
C) Verifying information from third parties is not a necessary step in an audit.
D) The process of preparing a company's annual financial statements is called auditing.

Question 10

Which of the following statements is true of limited liability partnerships (LLP)?

A) All the partners lose only their capital contribution in the LLP if the LLP fails.
B) The limited partners are personally liable for the debts and obligations of the LLP.
C) A limited partner whose negligent or intentional conduct causes injury cannot be held personally liable for his or her conduct.
D) If an LLP fails, the LLP's remaining assets are sold to help the largest stakeholder recover his or her investments in the LLP.

Question 11

________ are standards for the preparation and presentation of financial statements.

A) ISO 1:2002
B) General technical delivery conditions
C) Generally accepted accounting principles
D) Generally accepted auditing standards

Question 12

Which of the following statements is true of the generally accepted auditing standards (GAASs)?

A) These standards are set by the International Accounting Standards Board (IASB).
B) The International Accounting Standards are replacing GAAS.
C) They set forth rules for how corporations and accounting firms declare accounts on the corporation's financial statements.
D) They require sufficient evidence to afford a reasonable basis for issuing an opinion on the financial statements under audit.

Question 13

A(n)________ is an auditor's opinion that states that the financial statements are fairly represented except for,or subject to,a departure from GAAPs,a change in accounting principles,or a material uncertainty.

A) unqualified opinion
B) qualified opinion
C) adverse opinion
D) disclaimer of opinion

Question 14

Which of the following statements is true of a company that receives an opinion other than an unqualified opinion after an audit?

A) It will find it difficult to obtain loans from banks.
B) It will be able to sell its securities to the public quite easily.
C) It must perform another audit to verify the original opinion.
D) It will not be permitted to continue its business transactions.

Question 15

Paul is an independent auditor who has been hired to audit Pattorna,Inc.'s financial records.He finds that there is insufficient information about the financial records to draw a conclusion about their accuracy.Which of the following would Paul issue?

A) an unqualified opinion
B) a qualified opinion
C) an adverse opinion
D) a disclaimer of opinion

Question 16

Which of the following is true about the auditor verifying a corporation's financial statements?

A) The auditor must be an independent certified public accountant.
B) The auditor cannot use information about the corporation from third parties.
C) The auditor cannot inspect the corporation's real property unless he is closely associated with the company.
D) The auditor must render a qualified opinion after the audit is complete.

Question 17

If an auditor makes a disclaimer of opinion,this means that the auditor ________.

A) is of the opinion that the company's financial statement matches its performance but notes a few departures from GAAPs
B) is of the opinion that the company's financial statement does not accurately reflect the company's financial position
C) is unable to draw a conclusion about the accuracy of the company's financial records owing to lack of information
D) finds that the company's financial statements fairly represent the company's financial position

Question 18

A verification of a company's books and records pursuant to federal securities laws,state laws,and stock exchange rules that must be performed by an independent CPA is known as a(n)________.

A) probate
B) ademption
C) audit
D) deposition

Question 19

Holly Lane is an accountant with Mildred & Lane Co.She has recently been asked to visit Maine Manufacturers to survey their financial records,assess their compliance with federal and state laws,and provide an opinion reflecting the state of the company's financial records.Holly's assessment of the financial records of Maine Manufacturers is called a(n)________.

A) probate administration
B) audit
C) arraignment
D) easement

Question 20

Emerold LLP is an accounting firm.It has been hired to audit Blue Link,Inc.'s financial statements.The auditors of Emerold find that financial statements fairly represent the company's financial position,but the accounting standards do not follow GAAPs.Which of the following would the auditors provide?

A) an unqualified opinion
B) a qualified opinion
C) an adverse opinion
D) a disclaimer of opinion

Question 21

Which of the following statements is true of accountants' liability to clients in breach of contract suits?

A) Courts consider damages to include expenses incurred by the client in securing another accountant to perform the needed services.
B) Courts usually award punitive damages if the auditor provides a disclaimer of opinion after auditing clients' financial statements.
C) An accountant who fails to perform the terms specified in an engagement can be sued for damages only if the accountant displayed reckless regard.
D) Penalties incurred by the client for missed deadlines or lost opportunities are not considered by courts while awarding damages.

Question 22

________ is a rule that says that an accountant is liable only for negligence to third parties who are in privity of contract or in a privity-like relationship with the accountant.

A) The foreseeability standard
B) The Ultramares doctrine
C) Due diligence defense
D) Disclaimer of opinion

Question 23

Pursuant to obtaining a bank loan,Artcross,Inc.appointed William,an accountant,to prepare audited financial statements.William was made aware of the use of the financial statements.Upon inspection by the bank,the financial statements were found to be negligently prepared.Which of the following would be true in this scenario?

A) According to the foreseeability standard, William is liable to the bank for negligence only if he was aware that the financial statements were going to be used to obtain a loan.
B) According to Section 552 of the Restatement (Second) of Torts, William is not liable to the bank, as he did not know the identity of the third party.
C) William cannot be held liable for negligence if the foreseeability standard is applied.
D) William cannot be held liable for negligence if the Ultramares doctrine is applied.

Question 24

Which of the following can be used by an accountant to counter liability imposed under Section 11(a)of the Securities Act of 1933?

A) exclusionary rule
B) due diligence defense
C) the Ultramares doctrine
D) the foreseeability standard

Question 25

Tom was hired to prepare and certify a registration statement for Blue Scales,Inc.The Securities and Exchange Commission (SEC)found some omissions of material facts in the registration statement.Which of the following statements is true of this scenario?

A) Tom cannot be held liable as the SEC is not a member of the limited class of intended users of his statements.
B) Tom cannot be held liable as the SEC is not in privity of contract with him.
C) Tom can be held liable under Section 11(a) of the Securities Act of 1933 regardless of his willfulness in making misstatements of facts.
D) Tom can avoid liability if he can show that he had reasonable grounds to believe that the statements made were true.

Question 26

Carl is an accountant who helped Sireus,Inc.to evaluate and sell its securities.Mark,who purchased the securities,finds that they have been overvalued.Which of the following statements is true of this scenario?

A) Carl has violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 if he is guilty of ordinary negligence.
B) Mark can bring a civil private cause of action and seek monetary damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.
C) Mark cannot sue Carl as he is not in a privity of contract relationship with him.
D) Mark cannot sue Carl as Mark is only an incidental beneficiary of Carl's work.

Question 27

An accountant can defeat the imposition of liability under Section 18(a)if the accountant ________.

A) can show that the misleading statement was made to protect the company from bankruptcy
B) can show that he acted negligently
C) was an employee of the plaintiff
D) can show that the plaintiff had knowledge of the False statement

Question 28

________ prohibits any manipulative or deceptive practice in connection with the purchase or sale of a security.

A) Section 11(a) of the Securities Act of 1933
B) Private Securities Litigation Reform Act of 1995
C) Section 10(b) of the Securities Exchange Act of 1934
D) Section 15 of the Securities Act of 1933

Question 29

Which of the following rules provides that an accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client's financial statements?

A) Section 552 of the Restatement (Second) of Torts
B) the foreseeability standard
C) the Ultramares doctrine
D) due diligence defense

Question 30

Sean is an accountant who is facing a civil lawsuit.The lawsuit has been filed by one of his clients,Naturs,Inc.To recover punitive damages,Naturs should prove that ________.

A) Sean intentionally misrepresented a material fact
B) its accounting standards were not met by Sean
C) Sean mistakenly prepared an unaudited financial statement
D) it missed deadlines due to Sean's failure to perform

Question 31

Which of the following statements is true of Rule 10b-5?

A) Privity of contract is a necessity for bringing a lawsuit under this rule.
B) Civil private lawsuits are not permitted under this rule.
C) Only purchasers and sellers of securities can sue accountants under this rule.
D) Ordinary negligence imposes liability on the accountant under this rule.

Question 32

A(n)________ is defined as intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damage.

A) unqualified opinion
B) actual fraud
C) disclaimer of opinion
D) constructive fraud

Question 33

Which of the following statements is true of accountants' liability to third parties in breach of contract and fraud cases?

A) An accountant is liable to a third party for fraud only if the accountant has committed constructive fraud.
B) An accountant is not liable to a third party for fraud as the accountant is not in privity of contract with the third party.
C) An accountant is not liable to a third party in breach of contract cases as the accountant is not in privity of contract with the third party.
D) An accountant is liable to a third party for breach of contract if the accountant willfully refuses to perform the terms of the contract.

Question 34

Which of the following provides the broadest standard for holding accountants liable to third parties for negligence?

A) due diligence defense
B) the foreseeability standard
C) the Ultramares doctrine
D) exclusionary rule

Question 35

Which of the following statements is true of Section 18(a)of the Securities Exchange Act of 1934?

A) A plaintiff can recover damages by filing a negligence case under Section 18(a).
B) A plaintiff in a Section 18(a) action must prove that they relied on the misleading statement and that it affected the price of the security.
C) An accountant is liable even if he or she acted in good faith while making misleading statements of material facts.
D) An accountant is liable even if the plaintiff was aware of the misleading statement when the securities were sold.

Question 36

Ronald is an independent accountant.He is hired by Procious,Inc.to audit its financial statements.He fails to uncover that Procious,Inc.has been involved in embezzlement.A corporation makes a tender offer for the shares of Procious,Inc.and discovers the embezzlement.According to which of the following standards is Ronald liable for negligence?

A) the Ultramares doctrine
B) Section 552 of the Restatement (Second) of Torts
C) the foreseeability standard
D) implied warranty of fitness for a particular purpose

Question 37

________ imposes civil liability on accountants and others for making misstatements or omissions of material facts in a registration statement,or failing to find such misstatements or omissions.

A) Section 11(a) of the Securities Act of 1933
B) Section 10(b) of the Securities Exchange Act of 1934
C) Section 15 of the Securities Act of 1933
D) Section 12(a)(1) of the Securities Act of 1933

Question 38

Which of the following legislations can a state adopt in determining whether an accountant is liable in negligence to third parties?

A) Section 2(b) of the Robinson-Patman Act
B) Section 5 of the Federal Trade Commission
C) Section 552 of the Restatement (Second) of Torts
D) Section 16 of the Clayton Act

Question 39

A rule that says that an accountant is liable for negligence to third parties who are projected users of the client's financial statements is known as ________.

A) the foreseeability standard
B) the Ultramares doctrine
C) due diligence defense
D) privity of contract

Question 40

Which of the following statements is true of accountants' liability to clients in fraud cases?

A) Actual fraud occurs when an accountant acts with "reckless disregard" for the truth or consequences of his or her actions.
B) If an auditor does not verify information from third parties, constructive fraud is said to have been committed by the auditor.
C) Punitive damages may be awarded in cases of actual fraud.
D) The client can only recover nominal damages in cases of constructive fraud.

Question 41

Which of the following statements is true of Section 32(a)of the Securities Exchange Act of 1934?

A) This rule applies only to auditors.
B) Insider trading falls within the purview of this section.
C) A person guilty of violating Section 32(a) will be imprisoned regardless of his or her knowledge of the regulation violated.
D) The SEC files criminal lawsuits against those willfully violated federal securities laws.

Question 42

A certified public accounting firm that audits a public company may provide ________ to the same client.

A) bookkeeping services
B) internal audit services
C) investment banking services
D) tax services

Question 43

The accountant-client privilege is a law that provides that ________.

A) an accountant cannot be a witness against a client in a federal wire fraud case
B) an accountant's paperwork be taken as prima facie evidence against a client in a court action
C) an accountant cannot be called as a witness against a client in a court action
D) work product immunity is not applicable to an accountant

Question 44

Which of the following is a necessity to bring a private civil action against a violator of the Racketeer Influenced and Corrupt Organizations Act (RICO)based on securities fraud?

A) The accountant must not be a third-party independent contractor.
B) The defendant must have been criminally convicted in connection with the securities fraud.
C) The plaintiff should file the case before the government brings a lawsuit.
D) The lawsuit must be based on the Tax Reform Act.

Question 45

A public accounting firm that is registered with the Public Company Accounting Oversight Board (PCAOB)is reviewed ________.

A) twice a year if it audits more than 100 public companies a year
B) once in two years if it audits more than 100 public companies a year
C) once every year if it audits less than 100 public companies a year
D) once in three years if it audits less than 100 public companies a year

Question 46

The ________ specifically imposes penalties and fines for the willful understatement of a client's tax liability.

A) Tax Reform Act of 1976
B) Racketeer Influenced and Corrupt Organizations Act
C) Private Taxation Litigation Reform Act
D) Uniform Securities Act

Question 47

Which of the following is true of the Public Company Accounting Oversight Board (PCAOB)?

A) All members of the Public Company Accounting Oversight Board have to be CPAs.
B) The Public Company Accounting Oversight Board was created by the Tax Reform Act of 1976.
C) The SEC has oversight and enforcement authority over the board and its functioning.
D) The Public Company Accounting Oversight Board lacks the power to adopt rules concerning the ethics of public accountants.

Question 48

The Public Company Accounting Oversight Board (PCAOB)was created by the ________.

A) Securities Exchange Act of 1934
B) Securities Act of 1933
C) Tax Reform Act of 1976
D) Sarbanes-Oxley Act of 2002

Question 49

Which of the following statements is true of the Sarbanes-Oxley Act?

A) It requires all audit papers to be retained for at least ten years.
B) It requires the Public Company Accounting Oversight Board to inspect and review registered accounting firms that audit more than 100 public companies once a year.
C) It created the Securities Exchange Committee.
D) It allows a registered public accounting firm to simultaneously provide audit and legal services to a public company.

Question 50

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

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

Question 51

Which of the following statements is true of the audit committee mandated by the Sarbanes-Oxley Act?

A) The members of the audit committee are appointed by the SEC.
B) A person who receives compensation for any duties from a public corporation cannot be appointed as a member of its audit committee.
C) All the members of the audit committee must be financial experts by either education or experience.
D) The audit company is responsible for the appointment of accounting firms to audit the company.

Question 52

Martha is an accountant who helped Oltup,Inc.to file registration statements with the SEC.Oltup,Inc.then sold some of its securities.Sandra,who purchased the securities,finds that there are quite a few misleading statements,and she files a lawsuit under Section 18(a)of the Securities Exchange Act of 1934.Which of the following statements is true of this scenario?

A) Martha can defeat liability if she can show that Sandra was aware of the misleading statements when the securities were sold.
B) Martha is liable even if she can show that she acted in good faith.
C) Sandra can recover damages if she can prove that Martha acted negligently.
D) Sandra can recover damages if she can prove that she was in a privity of contract relationship with Martha.

Question 53

Which of the following statements is true of accountants' work papers?

A) Work product immunity protects only the work papers generated by an accountant during an audit.
B) Notes reconciling the accountant's report and the client's records and accountants' comments are not considered as accountants' work papers.
C) All states protect accountants' work papers from discovery.
D) Federal law allows for discovery of an accountant's work papers in a federal case against the accountant's client.

Question 54

Under the Sarbanes-Oxley Act,in order to audit a public company,________.

A) the auditing committee must comprise only of public accountants
B) a public accounting firm must register with the PCAOB
C) all public accounting firms must assign an accountant who works closely with one client over a long duration of time
D) all public companies must subject themselves to inspection and review by the board twice a year

Question 55

Which of the following statements is characteristic of the Sarbanes-Oxley Act?

A) The clients of a public accounting firm may appoint an employee of the accounting firm as its chief accounting officer six months after the audit.
B) A person who receives compensation for any duties from a public corporation cannot be appointed as a member of its audit committee.
C) It assigns an audit partner for each audit by a certified public accounting firm.
D) It subjects all public accounting firms to annual review and inspection by the PCAOB.

Question 56

________ is a rule that limits a defendant's accountability to his or her equivalent degree of fault.

A) Privity of contract
B) Due diligence defense
C) Proportionate liability
D) The Ultramares doctrine

Question 57

Which of the following statements is true of the Private Securities Litigation Reform Act of 1995?

A) It made it easier for plaintiffs to bring class action securities lawsuits.
B) It replaces proportionate liability with joint and several liability.
C) It results in the accountant being the "deep pocket" defendant regardless of the accountant's degree of fault.
D) It allows joint and several liability to be imposed if the defendants acted knowingly.

Question 58

The ________ is a state law that provides that an accountant's work papers cannot be used against a client in a court action.

A) work product immunity
B) accountant-client privilege
C) fair use doctrine
D) Noerr Doctrine

Question 59

Which of the following statements is true of the Tax Reform Act of 1976?

A) It imposes fines and imprisonment for an individual for aiding and assisting in the preparation of a False tax return.
B) An accountant who negligently understates a client's tax liability can be imprisoned under this act.
C) It provides for both criminal and civil penalties for securities fraud.
D) It makes it a criminal offense for any person who willfully makes any False statements in a registration statement.

Question 60

Which of the following legislations makes it a criminal offense to willfully make any untrue statement of material fact in a registration statement filed with the SEC?

A) Section 24 of the Securities Act of 1933
B) Tax Reform Act of 1976
C) Private Securities Litigation Reform Act of 1995
D) Section 10(b) of the Securities Exchange Act of 1934

Question 61

Plaintiffs must prove that the accountants behaved intentionally or recklessly in a lawsuit based on Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934.

Question 62

Privity of contract is irrelevant in lawsuits based on Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934.

Question 63

Section 11(a)of the Securities Act of 1933 holds accountants liable for omissions of material facts in registration statements regardless of the accountant's intentions.

Question 64

The financial statement prepared by an accountant is considered an expertised portion of the registration statement only if the accountant is a CPA.

Question 65

Violations of GAAPs or GAASs are prima facie evidence of negligence.

Question 66

While conducting an audit,an auditor must verify information from third parties.

Question 67

Ordinary negligence by accountants violates Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934.

Question 68

Under the common law,accountants may be held liable by their clients for fraud.

Question 69

Compliance with GAASs automatically relieves auditors of liability to clients in negligence cases.

Question 70

The plaintiff must prove privity of contract to recover monetary damages under Section 11(a)of the Securities Act of 1933.

Question 71

Third parties usually cannot sue accountants for breach of contract.

Question 72

By showing that the defendant acted negligently,a plaintiff can win a lawsuit filed under Section 18(a)of the Securities Exchange Act of 1934.

Question 73

The foreseeability standard holds accountants liable to third parties only if the accountant was aware of the identity of the third party.

Question 74

Only purchasers and sellers of securities can sue under Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934.

Question 75

GAAPs and GAASs are used to determine the conduct of a "reasonable accountant" in negligence suits.

Question 76

The Securities Act of 1933 requires that before a corporation or another business sells securities to the public,the issuer must file a registration statement with the Securities and Exchange Commission (SEC).

Question 77

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

Question 78

The International Financial Reporting Standards (IFRSs)are used primarily by companies operating within the United States.

Question 79

A person cannot be imprisoned under Section 32(a)unless he or she had knowledge of the rule or regulation violated.

Question 80

The Financial Accounting Standards Board (FASB)issues new GAAP rules and amends existing GAAP rules.