Deck 26: Accountants Liability

Question 1

Investors and creditors rely upon the independent evaluation by accountants of the financial statements issued by management.

Answer 1

True

Question 2

Penalties on accountants for wrongdoing in the preparation of tax returns are imposed by the

A)Internal Revenue Code.
B)Federal Bureau of Investigation.
C)Sarbanes-Oxley Act.
D)GAAP.

Answer 2

A

Question 3

The accounting firm of Griggs, Macon, and Fiurre audits the financial records of Chasse, a public company. The Sarbanes-Oxley Act prohibits the accounting firm from providing consulting services to Chasse on human resource matters.

Answer 3

True

Question 4

Generally accepted accounting principles (GAAP)are the rules for preparing financial statements.

Question 5

BGH Accounting firm audited the financial statements that were included in E-prise's registration statement. The financial statements overstated sales by 2000%. In conducting the audit, BGH did not comply with generally accepted auditing standards (GAAS). Under the Securities Act of 1933, BGH is liable for any material misstatement or omission in the financial statements it prepared for E-prise.

Question 6

Which of the following correctly lists auditor opinions from most to least favorable?

A)disclaimer, unqualified, adverse, qualified
B)unqualified, qualified, adverse, disclaimer
C)qualified, unqualified, disclaimer, adverse
D)unqualified, qualified, disclaimer, adverse

Question 7

An accountant is liable for fraud to

A)only her client.
B)only her client and any known user of her information.
C)any foreseeable user of her work product who justifiably relied on it.
D)any third party with the exception of investors or creditors.

Question 8

John is auditing MegaCorp. He finds an accounts payable for 10,000 cases of ball bearings. He checks to make sure the paper actually arrived and that the receiving department signed and dated the invoice. He also checks the original purchase order to make sure the purchase was properly authorized. This illustrates

A)tracing.
B)vouching.
C)following.
D)monitoring.

Question 9

Which statement best describes the 1934 Act's position on whistleblowing?

A)Auditors who suspect that a client has committed an illegal act must notify the client's board of directors.
B)Whistleblowers receive no protection under the Act and must decide for themselves if disclosure is worthwhile.
C)If a client's board is notified of potential wrongdoing and does nothing, the auditor need do nothing more.
D)Auditors are advised to avoid direct contact with the SEC regarding potential client wrongdoing.

Question 10

Manuel, in conducting an audit, must rely most heavily on rules found in generally accepted accounting principles (GAAP).

Question 11

Under the amended Securities Exchange Act of 1934, accountants are liable jointly and severally whether or not they knew they were violating the law.

Question 12

An auditor for Ralco Accounting firm was auditing the financial statements of E-prise. The auditor suspected that E-prise was engaged in illegal activity. Under the Securities Exchange Act of 1934, the auditor is required to notify E-prise's board of directors of the suspicions.

Question 13

An engagement letter is a written contract

A)between an accountant and client.
B)in anticipation of marriage.
C)between a corporation and the AICPA.
D)intended to create a fiduciary duty of an accountant to his client.

Question 14

What was at issue in the case Oregon Steel Mills, Inc. v. Coopers & Lybrand, LLP ?

A)whether an accounting firm was liable for its client's loss
B)whether the Securities Act of 1933 was constitutional
C)the extent of liability a fraudulent accountant should assume
D)breach of the accountant-client privilege

Question 15

Teresa is suing her accountant for fraud. To win, Teresa must show that she justifiably relied on the accountant's fraudulent statement.

Question 16

In 2007, the Securities and Exchange Commission (SEC)began to allow foreign companies to use which of the following for its reporting standards?

A)SOX
B)GAAP
C)GAAS
D)IFRS

Question 17

After completing an audit, the most unfavorable opinion an auditor can issue is a disclaimer of opinion.

Question 18

Adam claimed that N & A, its accounting firm, negligently prepared an audit. To hold the accounting firm liable, which of the following elements must be established?

A)scienter or guilty knowledge
B)a fiduciary relationship
C)failure to exercise due care
D)an executed engagement letter

Question 19

An auditor who determines a company is materially misstating certain items on its financial statements should issue a(n)

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

Question 20

To verify transactions, accountants use two mirror-image processes: vouching and tracing. Tracing is a process where the accountant begins with an item of original data and checks out all the activity that has occurred from beginning to end to make sure it has been properly recorded throughout the bookkeeping process.

Question 21

Fast Auditors prepared audited financial statements for Mega Company's registration statement in compliance with the 1933 Securities Act. John bought stock in Mega Company. It was discovered that the financial statements prepared for the registration statement contained some important omissions. John sued Fast Auditors to recover his investment when Mega Company turned out to be a bad investment. What must John prove to recover from Fast Auditors?

Question 22

Which of the following is NOT a provision of the Sarbanes-Oxley Act of 2002?

A)Congress established the Public Company Accounting Oversight Board, which has the authority to regulate public accounting firms, establishing audit rules and ethics guidelines.
B)After five years with a client, the lead audit partner must rotate off the account for at least five years.
C)Congress established the American Institute of Certified Public Accountants to develop ethical guidelines in a Code of Professional Conduct.
D)Auditors must communicate regularly and completely with audit committees of their clients and must describe options the firm considers in preparing financial statements.

Question 23

The accounting firm of Gray & Co. did accounting work for both Regional Bank and Carter Electronics. Without Carter's knowledge or approval, Gray & Co. discussed Carter's financial problems with Regional Bank. In this situation, Gray & Co.

A)breached a legal obligation to keep all client information confidential.
B)breached a moral, but not a legal, obligation of confidentiality.
C)did not breach any obligations to its clients.
D)acted properly because it was protecting its client, Regional Bank, from possibly making an unwise loan to Carter Electronics.

Question 24

Criminal liability for accountants

A)is not an option under securities law; there is only civil liability.
B)is possible under the Securities Act of 1933, the 1934 Act, state securities laws, and the Internal Revenue Code.
C)may result in fines but not imprisonment from violation of the federal securities laws.
D)will result from violation of the accountant-client privilege under federal law.

Question 25

Discuss how SEC rules affect the legal and the ethical relationship between accountants and the companies they audit.

Question 26

GBH, an accounting firm, was hired to prepare financial statements for E-treme. Great State Bank has asked to see GBH's working papers since it is thinking about extending a $4 million line of credit to E-treme. Which of the following statements is correct?

A)GBH can show the bank the working papers because Great State Bank has a proper purpose.
B)GBH can show the bank the working papers because Great State Bank is a known third party.
C)GBH cannot show the bank the working papers under any circumstances as they are not finalized.
D)GBH cannot show the bank the working papers unless E-treme gives permission.

Question 27

John is a CPA in charge of auditing his client, McMillen & Co. John's duty of care to McMillen will most likely  be breached if John

A)gives his client an oral report instead of a written report.
B)gives his client incorrect advice based on an honest error in judgment.
C)fails to give tax advice that would save his client money.
D)fails to follow generally accepted auditing standards (GAAS).

Question 28

Under what circumstances are accountants liable to their clients for fraud?

Question 29

Under SOX, accountants for public companies must keep all audit work papers for at least

A)two years.
B)five years.
C)seven years.
D)ten years.

Question 30

An auditor suspects its client is committing illegal acts that will have a material impact on its financial statements. What is the auditor legally required to do and under what circumstances would the auditor directly notify the SEC?

Question 31

Larry is a certified public accountant in a firm that audits public companies. Larry is accused of unethical conduct. Is Larry required to abide by the ethical standards of the Public Company Accounting Oversight Board?

A)Yes.
B)He can be held liable only if he had actual knowledge of the particular guideline he is accused of violating.
C)No, the PCAOB establishes audit rules, not ethical guidelines.
D)No, the PCAOB has no authority over Larry.

Question 32

In which of the following cases will the federal accountant-client privilege protect the information from being disclosed?

A)a criminal case
B)a case involving the SEC
C)a case concerning the preparation of tax returns
D)a civil case involving the IRS

Question 33

GBH, an accounting firm, was hired to prepare financial statements for E-treme. GBH

A)cannot show the working papers to E-treme unless there is a valid court order.
B)cannot show the working papers to E-treme unless it obtains permission from the AICPA.
C)can show the working papers to anyone that asks, since the accountant owns them.
D)must allow E-treme access to the working papers.