Deck 11: Liability of Accountants and Other Professionals

Question 1

In the Case Opener "WorldCom," the court ruled that the chairman of WorldCom's board of directors could have no personal liability for misrepresentations of the company's condition in filings with the Securities and Exchange Commission.

Answer 1

False

Question 2

The reasonably foreseeable users test holds an accountant liable to any third-party who was or should have been foreseen as a possible user of the accountant's work product and did, in fact, use and rely upon that work product for a proper business purpose.

Answer 2

True

Question 3

Under the Restatement test, regarding liability for negligence to third parties, 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.

Answer 3

True

Question 4

The accountant-client privilege means that the accountant has the privilege of demanding payment for accounting services.

Question 5

When hired to perform a task, the accountant enters into a contract called an engagement letter with the client that makes explicit and implicit promises, which, if not fulfilled, subject the accountant to liability.

Question 6

Which of the following was the result on appeal in the case in the text In re Century Aluminum Company Securities Litigation, involving plaintiffs who purchased secondary-offering shares and who attempted to sue under

Question 7

At a minimum, the duty of care of the accountant entails compliance with which of the following?

A) Generally acknowledged accounting principles only.
B) Generally acknowledged auditing standards only.
C) Generally accepted accounting principles only.
D) Generally accepted auditing standards and generally acknowledged accounting principles.
E) Generally accepted accounting principles and generally accepted auditing standards.

Question 8

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.

Question 9

Many accountants and other professionals store confidential information on servers owned and maintained by a third party.

Question 10

Plaintiffs have been successful in recent years bringing fraud suits against accountants under the Racketeer Influenced and Corrupt Organizations Act.

Question 11

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

Question 12

Which of the following was the result at the Supreme Court level in Matrixx Initiatives, Inc. v. Siracusano, the case in the text in which the plaintiffs brought a class action alleging that the defendant violated securities laws by failing to release reports that its product, Zicam Cold Remedy, had been found to result in a loss of smell?

A) That the plaintiffs would not be allowed to proceed because they did not present statistically significant evidence that Zicam caused loss of smell.
B) That the plaintiffs would be allowed to proceed because they sufficiently pleaded scienter and also presented statistically significant evidence that Zicam caused loss of smell.
C) That under the "total mix" standard, the plaintiffs adequately pleaded materiality in regard to the alleged failure to disclose, the plaintiffs adequately pleaded scienter, and the plaintiffs would be allowed to proceed.
D) That under the "total mix" standard, the plaintiffs failed to sufficient plead materiality in regard to the alleged failure to disclose and therefore would not be allowed to proceed.
E) That although under the "total mix" standard, the plaintiffs pleaded materiality in regard to the alleged failure to disclose, the plaintiffs failed to sufficiently plead scienter and would therefore not be allowed to proceed.

Question 13

An action brought against an accountant who fails to properly perform the job for which the accountant was hired is known as a(n) ________ action.

A) malfeasance
B) malpractice
C) impropriety
D) actuary
E) class

Question 14

The Financial Accounting Standards Board established:

A) The generally accepted liability insurance agreement
B) The auditing perfections standards
C) The generally accepted accounting principles
D) The certified public accounting standards
E) The requirements for licensing accountants

Question 15

Whether third parties have a claim against an accountant on the basis of their reliance upon negligently prepared financial statements is the same in all states because it is governed by federal law.

Question 16

Due to Enron Corporation's ________, a significant amount of responsibility for that outcome was placed on the firms that provided accounting services to the corporation.

A) class action law suit
B) bankruptcy action
C) public disclosure law suit
D) fraudulent class action suit
E) failure to disclose law suit

Question 17

The attorney-client privilege means that information given by a client to his or her accountant cannot be revealed without the client's permission.

Question 18

Under common law, what are the three primary types of liability assessed against accountants?

A) Negligence, breach of contract, and accounting misalignment
B) Breach of contract, fraud, and accounting misalignment
C) Fraud, negligence, and accounting misalignment
D) Breach of contract, negligence, and innocent misrepresentation
E) Negligence, breach of contract, and fraud

Question 19

Accountants are exempt from being sued for malpractice; this is reserved for attorneys and doctors only.

Question 20

State protection of an accountant-client privilege will always apply when a federal law is at issue because each state sets their own standards for accountant-client privilege.

Question 21

About half of the states have adopted the ________ of accountant liability for negligence to third-parties.

A) Restatement test
B) negligent accountant test
C) defrauder test
D) liability standards test
E) states liability test

Question 22

An accountant is entitled to which of the following in the instance of a breach of contract where the accountant completed substantial performance?

A) The full amount of the contractually agreed-on fee minus the amount of damages caused by the accountant.
B) The contractually agreed-on fee without any deduction.
C) A reasonable hourly rate.
D) No more than one thousand dollars.
E) Nothing.

Question 23

When an accountant is found liable for fraud, what type of damages may be assessed in addition to compensatory damages in order to punish the accountant?

A) Punishable
B) Punitive
C) Material
D) Nominal
E) Incidental

Question 24

Which group established GAAS?

A) The American Institute of Certified Public Accountants
B) The American Institute of Auditors
C) The Financial Accounting Standards Board
D) The American Accounting and Auditing Standards Board
E) The Federal Accounting Standards Board

Question 25

Which of the following is true regarding states adhering to the privity or near-privity rule for third party liability of accountants?

A) All the states utilize it.
B) All states except one utilize it.
C) Three-quarters of the states utilize it.
D) One-half of the states utilize it.
E) Only a few states utilize it.

Question 26

If no, or insubstantial, accounting procedures were used in the compilation of the document, a financial statement is considered ________.

A) Audited
B) Unaudited
C) Unqualified
D) Qualified
E) Generally accepted

Question 27

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?

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

Question 28

Which of the following is false regarding compliance with GAAP and GAAS?

A) Failure to comply with GAAP and GAAS will almost certainly constitute a breach of duty.
B) Compliance with GAAP and GAAS does not automatically mean that the duty of care has been met.
C) In some circumstances, a reasonable, competent accountant would do more than GAAP or GAAS requires.
D) GAAP standards are established by the Financial Accounting Standards Board, and GAAS standards are established by the American Institute of Certified Public Accountants.
E) State statutes may not impose additional legal requirements on accountants beyond GAAP and GAAS.

Question 29

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

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

Question 30

Which of the following is viewed as a middle ground test in regard to accounting liability to third-party users?

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

Question 31

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

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

Question 32

As set forth in the case in the text, Bily v. Arthur Young & Co., which of the following is true regarding auditor liability to third parties under the Restatement rule?

A) An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose generally undertakes no duty to third parties.
B) An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose does undertake a duty to any foreseeable third-party users.
C) An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose undertakes a duty only to third parties who are financial institutions.
D) An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose generally undertakes a duty only to directors of the company who provide loans to the company.
E) An auditor retained to conduct an annual audit and to furnish an opinion for no particular purpose generally undertakes no duty to third parties except for financial institutions and also directors who provide loans to a company.

Question 33

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.

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

Question 34

Generally, unless engaged to detect fraud an accountant is not a(n) ________ unless the fraud is uncovered in the course of exercising reasonable care and skill.

A) fraud detector
B) absolute reporter
C) fraud reporter
D) insulated protector
E) frequent reporter

Question 35

The ________ involves accountant liability to third parties based upon privity or near-privity.

A) Ultramares rule
B) classification test
C) reliance test
D) privity rule
E) Carrott test

Question 36

Norman wants to sue his accountant for fraud, but his accountant was only grossly negligent. What type of fraud could Norman sue for since there was no fraudulent intent?

A) Comparative fraud
B) Actual fraud
C) Gross negligent fraud
D) Deceived fraud
E) Constructive fraud

Question 37

Which of the following standards is used in applying the reasonably foreseeable users test regarding accountant liability to third parties?

A) Strict product liability
B) Negligence
C) Fraud
D) Breach of contract
E) Privity

Question 38

Which statement accurately describes the liability of accountants under the law of Canada?

A) Canadian law is well settled in relation to an accountant's liability to nonclients.
B) Canadian law does not recognize liability of an auditor in relation to a prospectus distributed with the auditor's filed consent by an issuer of securities containing misrepresentations.
C) Canadian law does not recognize liability on the part of an auditor for misrepresentations made in secondary-market disclosures made with the auditors' written consent.
D) As in the U.S., in Canada the common law holds accountants liable for negligence to clients.
E) In Quebec alone, accountants may not be held liable even if a causal link between fault and damage is established.

Question 39

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

A) The economy will benefit if investors recognize that they have sufficient rights of recovery.
B) It is only fair to hold accountants liable if they are in privity with a plaintiff.
C) 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.
D) Potential investors should have a route of recovery even if they could not be foreseen by accountants.
E) The general public should have a route of recovery even if they could not be foreseen by the accountant.

Question 40

Deiandra is an accountant who just completed an audit. Deiandra will issue a[n] ________ stating her assessment of the company that she audited.

A) letter of recommendation
B) audit form
C) opinion letter
D) disclaimer letter
E) corrective action decree

Question 41

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.
Andrew may be entitled to complete compensation minus the amount of damages caused by the breach if he ________ performed on the contract.

A) Completely
B) Substantially
C) Partially
D) Adequately
E) Materially

Question 42

Which statement accurately describes the requirements regarding working papers under the Sarbanes-Oxley Act of 2002?

A) Accountants must maintain working papers for ten years starting with the end of the fiscal period in which the audit was conducted.
B) Accountants must maintain working papers for seven years starting on the last day of the audit.
C) Accountants must maintain working papers for five years starting with the end of the fiscal period in which the audit was conducted.
D) Accountants must maintain working papers for one year starting on the last day of the audit.
E) The act does not require that accountants maintain working papers.

Question 43

Opal has performed an audit and has various documents that she used to complete the audit including notes, copies, calculations, and memorandums. These documents would be known as:

A) accounting documents.
B) working papers.
C) audit portfolio.
D) audit memoranda.
E) client portfolio.

Question 44

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.
The contract that Andrew and Dominique entered into setting the scope of Andrew's duties is referred to as a[n] ________.

A) Engagement letter
B) Accounting contractual letter
C) Auditing contractual letter
D) GAAP letter
E) GAAS letter

Question 45

What must a plaintiff do in order to recover damages under the Securities Act of 1933 after purchasing a security covered by a registration statement containing false information or missing information?

A) A plaintiff must prove that they relied to their detriment on the registration statement.
B) A plaintiff must prove that they were in privity of contract with the accountant at issue.
C) The plaintiff must establish reliance on the document and privity of contract with the accountant.
D) The plaintiff must establish reliance on the financial statement, privity with the accountant, and also that the securities were purchased within the previous 18 months.
E) The plaintiff does not have to prove reliance on the financial statement or establish privity.

Question 46

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina.
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 action brought by Bank ABC against Amina based upon the loss of funds on Jonathan's loan?

A) The bank will be able to recover because there was privity of contract.
B) The bank will be able to recover because no more than $10,000 was involved.
C) The bank will be able to recover because Amina was aware of how her work would be used even if she did not know the exact name of the bank involved.
D) The bank will not be able to recover because the identity of the bank was not known to Amina.
E) The bank will not be able to recover unless it can establish that it had dealt with Amina in the past.

Question 47

The Public Company Accounting oversight board was created by the Sarbanes-Oxley Act to do what?

A) Let government take over an audit if fraud is found by an accountant
B) Give states the right to shut down companies who commit fraud
C) Give the federal government control over state accounting practices
D) Obtain greater government oversight of public accounting firms
E) Make sure that CEOs of major corporations pay their taxes

Question 48

Which of the following is false regarding the Private Securities Litigation Reform Act?

A) The act sets forth a specific set of actions and guidelines an accountant must follow after identifying a potentially illegal activity when conducting an audit.
B) The act makes no reference to notifying the SEC of wrongdoing although it does reference notifying the applicable company's board of directors.
C) The act states that accountants are liable for the portion of the damages for which they are responsible.
D) In the event of a willful violation of the act, the SEC can seek an injunction against the accountant.
E) Under the act, an accountant's silence when the accountant thinks he or she might have discovered fraud is enough to constitute aiding and abetting.

Question 49

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege.
The notes, calculations, memorandums, and similar documents that Norah developed in her review of Joel's financial statements are called which of the following?

A) Working papers.
B) Consultation papers.
C) Computation papers.
D) Analysis papers.
E) Review papers.

Question 50

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina.
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 whether Bank XYZ can recover against Amina based upon the loan to Yuri?

A) Bank XYZ will not be able to recover because it was not in privity with Amina.
B) Bank XYZ will not be able to recover because Amina did not know that Yuri planned to get a loan from Bank XYZ.
C) Bank XYZ will not be able to recover $100,000 from Amina because the transaction went from $10,000 to $100,000, increasing materially the audit risk.
D) Bank XYZ will be able to recover from Amina because there was privity of contract.
E) Bank XYZ will be able to recover from Amina only if they have been a client of hers in the past.

Question 51

Besides attorneys, who else may be held liable in a malpractice action?

A) Doctors only
B) Doctors and accountants only
C) Doctors, real estate brokers, and accountants
D) Real estate brokers but not accountants
E) Only lawyers can be sued for malpractice

Question 52

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.
If Andrew engaged in ________ breach, he is not entitled to compensation for work completed.

A) A substantial
B) An adequate
C) A material
D) Any type of
E) A comprehensive

Question 53

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

A) Working papers can be used as evidence in negligence cases.
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 only if a non-corporate plaintiff is involved.
E) Working papers may be used as evidence in negligence cases only if the accountant failed to provide the client with copies of them.

Question 54

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina.
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?

A) The bank will be able to recover because it was in privity with Amina.
B) The bank will be able to recover because it was in privity with Maggie, and Maggie was in privity with Amina.
C) The bank will be able to recover because Amina was aware that her audit would be used to obtain a loan.
D) The bank will not be able to recover because it cannot establish reliance upon Amina's work.
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 55

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege.
What is Norah's contract with Joel to do audit work for him called?

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

Question 56

Under the Sarbanes-Oxley Act of 2002, how long are accountants required to keep working papers?

A) 3 years.
B) 5 years.
C) 10 years.
D) for as many years as the firm is in existence.
E) there is no specified time under Sarbanes-Oxley that working papers must be kept.

Question 57

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.
Which of the following would be available to Dominique, assuming that she can establish that Andrew failed to meet his contractual obligations?

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

Question 58

Teliva has been hired as an accountant to audit a major firm. Teliva is required as an accountant to use adequate procedures so that they can detect illegal acts committed by an audited company under which of the following acts?

A) The Private Equities and Reformers Act
B) The Public Fraud Protection Act
C) The Public Defender Act
D) The Private Securities Litigation Reform Act
E) The Fraud Deterrence in Auditing Act

Question 59

An accountant's failure to fulfill obligations under GAAP and GAAS is considered prima facie evidence of what?

A) a failure of due diligence
B) negligence
C) an affirmative defense
D) indirect evidence of malpractice
E) misleading the SEC

Question 60

For which of the following does the Securities Exchange Act impose liability?

A) Fraudulent statements made to the SEC.
B) Fraudulent statements made to courts.
C) Fraudulent statements made to a client in connection with performing an audit.
D) Negligence in performing an audit or in the construction of a financial statement.
E) Fraud in performing an audit.

Question 61

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege.
Which of the following is not a requirement in order to recover damages under

Question 62

[Sami's Coffee Shop] Javier, a new accountant who just opened his accounting firm, contracted with LittleBank to engage in accounting work for approval of loan applications. One of the applications was from Sami, owner of Sami's Coffee Shop. Sami provided Javier with copies of her income and loss statements. While looking through Sami's documents, Javier noticed multiple payments in large amounts for items listed only as "inventory" or "miscellaneous office supplies", which was odd since Sami told him the Coffee Shop served only coffee and tea. Javier did not ask Sami about the discrepancy because Sami seemed like an honest person. Javier completed the audit and prepared an opinion letter to LittleBank stating that Sami's Coffee Shop was in excellent financial condition and should feel confident in approving Sami's loan. The letter included a broad, general disclaimer. After sending the letter, Javier procured professional indemnity insurance to protect him from any malpractice claim. A month later, Sami was arrested for selling stolen jewelry from her shop and she defaulted on the loan.
Under what theory could LittleBank sue Javier?

A) None, because Sami, not Javier, engaged in fraud.
B) None, because Sami's conduct was not reasonably foreseeable.
C) Negligence, because Javier failed to exercise the care of a competent, reasonable professional.
D) Strict liability.
E) Fraud, because there is evidence of Javier's wrongful intent.

Question 63

[Unaudited financial statements] ABC Company hires Abe, an accountant, to create financial statements. Abe creates the financial statements without using general accounting procedures and clearly marks the statements as "unaudited".
Could Abe be liable for the contents of the financial statements?

A) Yes, because he did not follow GAAP.
B) Yes, but only for the areas of the document that did not include GAAP.
C) Yes, because he was negligent.
D) No, because accountants are not liable for the contents of unaudited financial statements.
E) No, if he inserted a broad and general disclaimer on the financial statements.

Question 64

An insurance policy that covers a person for errors or omissions made in the course of carrying out his or her professional responsibilities is sometimes referred to as a[n] ________.

A) professional malpractice policy
B) professional indemnification and malpractice policy
C) errors and omissions policy
D) professional errors policy
E) deductible policy

Question 65

[BigCom Securities] A&Z and DCB, two large accounting firms, prepared registration statements for BigCom, a large, public company, and provided information on BigCom to the SEC. A&Z's statements contained several misrepresentations about BigCom's securities. Wallace, BigCom's Chairman of the Board of Directors, signed the statements prior to the SEC filing. As is the usual procedure, Wallace signed the statements but did not read them carefully. He heard there were some questionable issues about the quality of the statements, but he felt confident with the expertise of the large accounting firms. Subsequently, purchasers of BigCom claimed there were misrepresentations about BigCom's shares in the statements filed with the SEC and sued A&Z, DCB, and Wallace. All three defendants deny liability.
Wallace claims that he should not be liable because he relied on the accounting firms' expertise with regard to the registration statements. Is Wallace correct?

A) Yes, directors are not required to perform a due diligence inquiry if another expert compiles the statement.
B) Yes, reliance is a valid defense where a director is involved.
C) Yes, but only if the accounting firm performed a due diligence inquiry.
D) No, because he is a director.
E) No, as a director, Wallace cannot use a defense of reliance because he was aware of questionable issues in the statements.

Question 66

[Carter's financials] Kayla works as an accountant. Rudy, an attorney, is working on a case for Carter, who is suing his business partner. Rudy does not have the time or the background to perform a complete analysis of Carter's financial statements, so Rudy asks Kayla to meet with Carter and assist Rudy with interpreting Carter's financial statements. Kayla meets with Carter, who provides a lengthy explanation of the financial statements and facts of the case. Afterwards, she prepares a memorandum for Rudy outlining her analysis of the financial issues of the case. Kayla runs into Carter at a baseball game several months later. Carter tells her that the stress is getting to him and he wants to move to Florida because he can no longer tolerate his business partner. A year later, at trial, Kayla is called as a witness by Carter's business partner to testify against Carter. No accountant-client privilege exists in Kayla's state, which is also where the trial takes place.
Which of the following, if true, would likely persuade a judge to require Kayla to testify about Carter's financial statements?

A) Kayla's meeting with Carter occurred before Rudy was involved in Carter's case.
B) Carter provided Kayla with a factual background of the case.
C) Kayla provided legal advice to Carter.
D) Kayla provided accounting services to Carter.
E) Kayla met with Carter at Rudy's direction.

Question 67

[Unaudited financial statements] ABC Company hires Abe, an accountant, to create financial statements. Abe creates the financial statements without using general accounting procedures and clearly marks the statements as "unaudited".
Under which of the following circumstances would the attorney-client privilege apply to an accountant?

A) When only accounting service is sought.
B) When a client meets privately with the accountant for the purpose of obtaining legal advice from the lawyer.
C) When the accountant is also an attorney.
D) When the client seeks the accountant's advice about a legal matter.
E) When the attorney refers the client to seek the accountant's advice about a legal matter.

Question 68

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege.
Assuming that Norah discussed with Gloria confidential communications that she had with Joel, which of the following is true regarding the ethical nature of that communication?

A) Norah did not commit an ethical violation in disclosing information to Gloria unless there was a state law providing for an accountant-client privilege.
B) Regardless of whether a state law existed providing an accountant-client privilege, federal statutory law deems such conduct unethical.
C) Norah did not commit an ethical violation because negotiations regarding a prenuptial agreement were involved.
D) Norah committed an ethical violation but only because Gloria was not yet married to Joel.
E) Norah committed an ethical violation.

Question 69

Under most professional indemnity insurance policies, which of the following must be true in order for a claim to be covered?

A) A policyholder must be insured at the time the claim arose or at the time the claim is filed.
B) A policyholder must be insured at the time the claim arose, but does not need to be insured at the time the claim is filed.
C) A policyholder must be insured at the time the claim arose and at the time the claim is filed.
D) A policyholder must be insured at the time the claim is filed, but does not need to be insured at the time the claim arose.
E) A policyholder need only show evidence of current payment of policy premiums.

Question 70

[Sami's Coffee Shop] Javier, a new accountant who just opened his accounting firm, contracted with LittleBank to engage in accounting work for approval of loan applications. One of the applications was from Sami, owner of Sami's Coffee Shop. Sami provided Javier with copies of her income and loss statements. While looking through Sami's documents, Javier noticed multiple payments in large amounts for items listed only as "inventory" or "miscellaneous office supplies", which was odd since Sami told him the Coffee Shop served only coffee and tea. Javier did not ask Sami about the discrepancy because Sami seemed like an honest person. Javier completed the audit and prepared an opinion letter to LittleBank stating that Sami's Coffee Shop was in excellent financial condition and should feel confident in approving Sami's loan. The letter included a broad, general disclaimer. After sending the letter, Javier procured professional indemnity insurance to protect him from any malpractice claim. A month later, Sami was arrested for selling stolen jewelry from her shop and she defaulted on the loan.
If Javier is sued for malpractice, is Javier protected from this lawsuit?

A) Yes, because it is a professional indemnity insurance policy and covers him as soon as he came into the profession.
B) No, because insurance does not cover mistakes made by professionals, especially this type of mistake.
C) No, because he was not insured at the time the claim arose.
D) Yes, because he was insured at the time the claim was filed.
E) No, because professional indemnity policies do not usually cover malpractice.

Question 71

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege.
Regarding Joel's assertion that Norah violated the accountant-client privilege, which statement is accurate?

A) Joel was correct since the accountant-client privilege exists in all states through common law.
B) Joel was incorrect because there is no accountant-client privilege in any state.
C) Joel was correct because the accountant-client privilege is recognized by federal law.
D) Joel was correct because the accountant-client privilege is recognized in all states through statutory law.
E) More information is needed in order to know if Joel is correct because the accountant-client privilege is recognized in some states, but not in all states.

Question 72

[Unaudited financial statements] ABC Company hires Abe, an accountant, to create financial statements. Abe creates the financial statements without using general accounting procedures and clearly marks the statements as "unaudited".
Are there any circumstances under which Abe could be held liable for the contents of the unaudited financial statements?

A) Yes, if Abe failed to clearly mark the financial statements as being unaudited.
B) No, accountants are not liable for the contents of unaudited financial statements.
C) Yes, if liability is reasonably foreseeable.
D) No, if Abe included an opinion letter with a broad and general disclaimer.
E) No, if Abe included an opinion letter with a qualification.

Question 73

[Sami's Coffee Shop] Javier, a new accountant who just opened his accounting firm, contracted with LittleBank to engage in accounting work for approval of loan applications. One of the applications was from Sami, owner of Sami's Coffee Shop. Sami provided Javier with copies of her income and loss statements. While looking through Sami's documents, Javier noticed multiple payments in large amounts for items listed only as "inventory" or "miscellaneous office supplies", which was odd since Sami told him the Coffee Shop served only coffee and tea. Javier did not ask Sami about the discrepancy because Sami seemed like an honest person. Javier completed the audit and prepared an opinion letter to LittleBank stating that Sami's Coffee Shop was in excellent financial condition and should feel confident in approving Sami's loan. The letter included a broad, general disclaimer. After sending the letter, Javier procured professional indemnity insurance to protect him from any malpractice claim. A month later, Sami was arrested for selling stolen jewelry from her shop and she defaulted on the loan.
Javier claims that he should not be liable for negligence because Sami committed fraud. Is he correct?

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

Question 74

[BigCom Securities] A&Z and DCB, two large accounting firms, prepared registration statements for BigCom, a large, public company, and provided information on BigCom to the SEC. A&Z's statements contained several misrepresentations about BigCom's securities. Wallace, BigCom's Chairman of the Board of Directors, signed the statements prior to the SEC filing. As is the usual procedure, Wallace signed the statements but did not read them carefully. He heard there were some questionable issues about the quality of the statements, but he felt confident with the expertise of the large accounting firms. Subsequently, purchasers of BigCom claimed there were misrepresentations about BigCom's shares in the statements filed with the SEC and sued A&Z, DCB, and Wallace. All three defendants deny liability.
Would DCB likely be held liable for the misrepresentations in the statements filed with the SEC?

A) Yes, based on a balancing test.
B) Yes, unless DCB can prove it performed a due diligence inquiry.
C) No, because it was not a willful violation.
D) No, because the misrepresentations were made by A&Z and an accounting firm cannot be held liable for something it did not do.
E) Yes, unless DCB can prove the misrepresentation did not involve a material fact.

Question 75

[Carter's financials] Kayla works as an accountant. Rudy, an attorney, is working on a case for Carter, who is suing his business partner. Rudy does not have the time or the background to perform a complete analysis of Carter's financial statements, so Rudy asks Kayla to meet with Carter and assist Rudy with interpreting Carter's financial statements. Kayla meets with Carter, who provides a lengthy explanation of the financial statements and facts of the case. Afterwards, she prepares a memorandum for Rudy outlining her analysis of the financial issues of the case. Kayla runs into Carter at a baseball game several months later. Carter tells her that the stress is getting to him and he wants to move to Florida because he can no longer tolerate his business partner. A year later, at trial, Kayla is called as a witness by Carter's business partner to testify against Carter. No accountant-client privilege exists in Kayla's state, which is also where the trial takes place.
If Kayla is called to testify at trial, would she likely be required to reveal information about Carter's financial statements?

A) Yes, because no accountant-client privilege exists.
B) No, because of the attorney-client privilege.
C) Yes, because no accountant-client privilege exists and the attorney-client privilege does not apply because Kayla is not an attorney.
D) No, because federal law recognizes the accountant-client privilege.
E) Yes, because the communication was not made in confidence for the purpose of obtaining legal advice from the attorney.

Question 76

[Sami's Coffee Shop] Javier, a new accountant who just opened his accounting firm, contracted with LittleBank to engage in accounting work for approval of loan applications. One of the applications was from Sami, owner of Sami's Coffee Shop. Sami provided Javier with copies of her income and loss statements. While looking through Sami's documents, Javier noticed multiple payments in large amounts for items listed only as "inventory" or "miscellaneous office supplies", which was odd since Sami told him the Coffee Shop served only coffee and tea. Javier did not ask Sami about the discrepancy because Sami seemed like an honest person. Javier completed the audit and prepared an opinion letter to LittleBank stating that Sami's Coffee Shop was in excellent financial condition and should feel confident in approving Sami's loan. The letter included a broad, general disclaimer. After sending the letter, Javier procured professional indemnity insurance to protect him from any malpractice claim. A month later, Sami was arrested for selling stolen jewelry from her shop and she defaulted on the loan.
Javier believes that the disclaimer in his opinion letter protects him from liability. Is he correct?

A) Yes, as long as the disclaimer was part of the opinion letter.
B) Yes, because a qualification will always limit liability.
C) No, he did not properly apply GAAP and GAAS rules.
D) No, because the disclaimer was part of the opinion letter and needed to be separate.
E) No, because the disclaimer is broad and general.

Question 77

[Unaudited financial statements] ABC Company hires Abe, an accountant, to create financial statements. Abe creates the financial statements without using general accounting procedures and clearly marks the statements as "unaudited".
When does the attorney-client privilege apply to accountants?

A) Always, because both the accountant and attorney would be paid experts.
B) Almost always, it depends on what percentage of the work the attorney might see in disclosing information to the accountant.
C) Never, attorney-client privilege is only between the attorney and the client and can never be extended to the accountant.
D) Under limited circumstances if the communication between the accountant and the client is made in confidence for the purpose of obtaining legal advice from the attorney.
E) It depends - a court has to make the determination if there is privity of relationship to extend the privilege.

Question 78

[Carter's financials] Kayla works as an accountant. Rudy, an attorney, is working on a case for Carter, who is suing his business partner. Rudy does not have the time or the background to perform a complete analysis of Carter's financial statements, so Rudy asks Kayla to meet with Carter and assist Rudy with interpreting Carter's financial statements. Kayla meets with Carter, who provides a lengthy explanation of the financial statements and facts of the case. Afterwards, she prepares a memorandum for Rudy outlining her analysis of the financial issues of the case. Kayla runs into Carter at a baseball game several months later. Carter tells her that the stress is getting to him and he wants to move to Florida because he can no longer tolerate his business partner. A year later, at trial, Kayla is called as a witness by Carter's business partner to testify against Carter. No accountant-client privilege exists in Kayla's state, which is also where the trial takes place.
If Kayla is called to testify at trial, what is her best argument against revealing information about Carter's financial statements?

A) Confidential working papers are always protected under state or federal law.
B) Ethically, Kayla has a duty to keep the information confidential in order to not breach state laws on malpractice.
C) Kayla could claim the attorney-client privilege.
D) Accountant-client privilege does not exist in her state but federal law recognizes it and would protect her.
E) State law would protect Kayla from malpractice and thus she would have to testify.

Question 79

Which of the following is true about professional indemnity insurance?

A) It provides liability coverage in the event that a professional is sued for failing to live up to his or her professional responsibilities.
B) It does not cover malpractice claims, only negligence claims.
C) Doctors and lawyers are eligible to purchase this insurance, but not other professionals.
D) Professionals purchase malpractice insurance, not professional indemnity insurance.
E) Only accountants who are certified public accountants may purchase professional indemnity insurance.

Question 80

[Carter's financials] Kayla works as an accountant. Rudy, an attorney, is working on a case for Carter, who is suing his business partner. Rudy does not have the time or the background to perform a complete analysis of Carter's financial statements, so Rudy asks Kayla to meet with Carter and assist Rudy with interpreting Carter's financial statements. Kayla meets with Carter, who provides a lengthy explanation of the financial statements and facts of the case. Afterwards, she prepares a memorandum for Rudy outlining her analysis of the financial issues of the case. Kayla runs into Carter at a baseball game several months later. Carter tells her that the stress is getting to him and he wants to move to Florida because he can no longer tolerate his business partner. A year later, at trial, Kayla is called as a witness by Carter's business partner to testify against Carter. No accountant-client privilege exists in Kayla's state, which is also where the trial takes place.
If Kayla is called to testify at trial, would she likely be required to reveal information about Carter's remarks at the baseball game?

A) Yes, because no accountant-client privilege exists.
B) No, because of the attorney-client privilege.
C) Yes, because no accountant-client privilege exists and the attorney-client privilege does not apply because Kayla is not an attorney.
D) No, because federal law recognizes the accountant-client privilege.
E) Yes, because the communication was not made in confidence for the purpose of obtaining legal advice from the attorney.