Deck 30: Liability of Accountants Other Professionals

Question 1

A professional can be liable for fraud whether or not he or she acted with fraudulent intent.

Answer 1

True

Question 2

Accountants and other professionals may not be held liable for negligence in the performance of their service.

Answer 2

False

Question 3

An opinion that disclaims any liability for false or misleading financial statements is too general.

Answer 3

True

Question 4

In most courts,auditors cannot be held liable to third parties for negligence in the performance of their duties.

Question 5

An accountant is required to discover every impropriety,defalcation,and fraud in a client's books.

Question 6

A client's negligence is never a defense to a charge of negligence against an accountant.

Question 7

A professional's gross negligence in performing a duty constitutes actual fraud.

Question 8

Accountants and other professionals do not face liability under the common law for any breach of contract.

Question 9

An accountant can avoid liability by proving that his or her negligence was only the proximate cause of the client's loss.

Question 10

If a third party will be affected by a contract,the parties to the contract are in privity with the third party.

Question 11

Under rules of professional misconduct,an attorney should not engage in conduct involving deceit.

Question 12

Attorneys are required to be familiar with well-settled principles of law applicable to a case.

Question 13

An attorney may be liable to a third party who relies on the attorney's legal opinion to the third party's detriment

Question 14

An accountant normally will be held liable to the client for incorrect judgment.

Question 15

Generally,an accountant must exercise the degree of care that an ordinarily prudent accountant would exercise.

Question 16

Under the Restatement (Third)of Torts,accountants can be held liable for negligence to any third parties.

Question 17

Malpractice is professional negligence.

Question 18

Professionals are obligated to adhere to standards of performance generally accepted within their profession.

Question 19

Each state establishes rules that govern the conduct of attorneys

Question 20

A qualified opinion must be specific and identify the reason for the qualification.

Question 21

Rex,an accountant,enters into a contract to provide services to Sofi.Rex does not finish the work within the contract's deadline.Sofi pays a penalty as a result of the missed deadline and hires Trey to complete the job.Rex is most likely liable for

A)nothing.
B)Sofi's penalty and the cost to hire Trey.
C)Sofi's penalty only.
D)the cost to hire Trey only.

Question 22

Lucille,an accountant,is subject to the accounting conventions,rules,and procedures that constitute generally accepted accounting principles (GAAP).GAAP are determined by

A)the International Accounting Standards Board.
B)the American Bar Association.
C)the American Institute of Certified Public Accountants.
D)the Financial Accounting Standards Board.

Question 23

Accountants may be subject to criminal penalties for violations of federal securities laws.

Question 24

Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year.

Question 25

An accountant is not liable for a misstatement to a purchaser of securities who knew of the misstatement but invested anyway.

Question 26

An accountant's working papers are the documents that are used and developed during an audit.

Question 27

An accountant is not liable for a misleading statement that affects the price of a security if the accountant acted in good faith.

Question 28

Working papers are the documents through which a court orders an accountant to audit a public company.

Question 29

A tax preparer that fails to give a taxpayer a copy of his or her tax return may be subject to a penalty under the Internal Revenue Code.

Question 30

Gert,an accountant,contracts to conduct an audit for Hailey.In performing the audit,Gert fails to detect certain misconduct.Gert is most likely

A)liable if a normal audit would have revealed the misconduct.
B)liable if Gert issues a specifically qualified opinion.
C)not liable if Gert generally disclaims any liability.
D)not liable if the misconduct was due to Hailey's negligence.

Question 31

An accountant who prepares a financial statement in good faith may avoid liability under Section 18 of the Securities Exchange Act of 1934.

Question 32

A failure to follow generally accepted accounting principles and generally accepted auditing standards is proof of a lack of due diligence.

Question 33

In no states are communications between an accountant and his or her client privileged.

Question 34

Estes,an accountant,contracts to perform services for Frasier.In performing those services,Estes uncovers a suspicious financial transaction.Estes is most likely not liable if he

A)acted negligently in failing to discover the transaction sooner.
B)conceals the discovery and otherwise finishes the work.
C)investigates and reports the discovery to Frasier.
D)obtains restitution from the perpetrator without Frasier's knowledge.

Question 35

An attorney may be liable in negligence to any third party who the attorney knows will rely on the attorney's work.

Question 36

The Sarbanes-Oxley Act of 2002 applies to domestic,but not foreign,public accounting firms that provide auditing services to "issuers."

Question 37

An accountant's liability under the Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934 requires privity of contract.

Question 38

Under the Sarbanes-Oxley Act of 2002,accountants must retain working papers relating to an audit or review for a certain period of time.

Question 39

Leslie,an accountant,enters into a contract to provide services to Marty.Leslie does not finish the work within the contract's deadline.Leslie is

A)liable for breach of contract.
B)not liable,because Leslie is a professional.
C)not liable,because Leslie's failure must have been Marty's fault.
D)not liable,because the work took longer than foreseen.

Question 40

An accountant's liability under the Securities Act of 1933 requires privity of contract with the purchaser of a security.

Question 41

Craig is an accountant whose clients include Digby Excavation Corporation.Elbert is Craig's attorney.Under the common law and by statute in many states,working papers that Craig develops when preparing financial reports for Digby are owned by

A)Craig.
B)Digby.
C)Elbert.
D)no one-the papers must be destroyed immediately after use.

Question 42

Jaime,an accountant,contracts to perform services for Kase.Jaime acts in good faith and conforms to generally accepted accounting principles,but makes a mistake in judgment.Jaime is most likely

A)liable if Jaime failed to discover a defalcation.
B)liable if Jaime failed to discover a fraud.
C)liable if Jaime failed to discover an impropriety.
D)not liable.

Question 43

Toby is an accountant whose clients include U-All Company.If Toby is negligent in his work for U-All,most courts would hold him liable to U-All and

A)any third party.
B)no third party.
C)third parties who are foreseen users of the work.
D)third parties who are reasonably foreseeable users of the work.

Question 44

Grover Nut Company files a suit against Hud,its former accountant,alleging actual fraud.Grover must prove

A)intent to deceive.
B)misrepresentation of a non-material fact.
C)the lack of an injury.
D)unjustifiable reliance.

Question 45

Hadley,an accountant,accumulates working papers while performing an audit for Ilene.After the audit,these documents belong to

A)Hadley,with Ilene having a right of access to the papers.
B)Ilene,with Hadley having a right of access to the papers.
C)neither Hadley nor Ilene-the papers must be disposed of.
D)the Public Company Accounting Oversight Board.

Question 46

Yves is an accountant charged with negligence by Zesty Soup Company,a client.Yves may successfully defend against the claim if he can show that

A)scienter was lacking.
B)he complied with all International Financial Reporting Standards.
C)the negligence was not the proximate cause of the client's losses.
D)the negligence was only contributory.

Question 47

Doug is an accountant whose clients include Everyday Products,Inc.(EPI).Under the Ultramares rule,if Doug is negligent in his work for EPI,he could be liable to

A)EPI and any third party.
B)EPI and third parties who are foreseen users of his work for EPI.
C)EPI and third parties who are reasonably foreseeable users of his work for EPI.
D)EPI only.

Question 48

Lars accuses Moe,an attorney,of committing malpractice.Malpractice is

A)a breach of ethics.
B)a defalcation.
C)a mistake in judgment.
D)professional negligence.

Question 49

Bruno is an accountant.Under the Sarbanes-Oxley Act of 2002,the degree of government oversight over the public accounting practices of Bruno and other accountants was

A)decreased.
B)increased.
C)eliminated.
D)unchanged.

Question 50

Mona,an accountant,prepares for NuTech Corporation a financial statement that omits a material fact.The financial statement is included in NuTech's registration statement,which Pam reads.Pam buys NuTech stock.Under Section 11 of the Securities Act of 1933,for Mona to be liable for the omission,Pam must show that

A)Pam relied on the omission.
B)Pam suffered a loss on the stock.
C)Pam knew about the omission before making her purchase.
D)the omission had no causal connection to her loss.

Question 51

Tiny is an accountant.Tiny's violation of generally accepted accounting principles and generally accepted auditing standards

A)does not indicate that Tiny was negligent.
B)is prima facie evidence that Tiny was negligent.
C)precludes Tiny from raising any defense against a negligence claim.
D)will never subject Tiny to liability.

Question 52

Lulu,an accountant,conducts an audit of Microstuff Toys,Inc.After the conclusion of the audit,the working papers created in preparing the audit must be

A)disposed of immediately.
B)kept until the Public Company Accounting Oversight Board's review.
C)maintained for seven years.
D)retained forever.

Question 53

Dwayne can be described as "a reasonably competent general practitioner of ordinary skill,experience,and capacity." This is the normal standard for judging the performance of

A)a client.
B)an accountant.
C)an attorney.
D)a tax preparer.

Question 54

Quibble Game Company's liabilities exceed its assets.Quibble hires Roo & Slay,an accounting firm,to prepare a balance sheet.Through Roo & Slay's negligent omissions,the sheet shows a positive net worth.Town Bank relies on the balance sheet to make a loan to Quibble.When Quibble defaults,Town files a suit against Roo & Slay.Under the Restatement rule,Roo & Slay is most likely

A)liable because Roo & Slay owed a duty of care to Quibble.
B)liable because Roo & Slay owed a duty to any foreseeable user.
C)liable if Roo & Slay knew that Town would rely on the balance sheet.
D)not liable because Roo & Slay and Town were not in privity.

Question 55

Ezra,an accountant,intentionally misstates a material fact to mislead Fruit Packing Industries,Inc. ,a client.Fruit Packing justifiably relies on the misstatement to its detriment.Ezra is most likely liable for

A)actual fraud.
B)constructive fraud.
C)destructive fraud.
D)virtual fraud.

Question 56

Marquis Company's liabilities exceed its assets,but the firm's employees falsify its books to reflect a positive net worth.Marquis hires Nan & Ollie,an accounting firm,to prepare a balance sheet,which is certified to show a positive net worth.Pure Credit Corporation relies on the balance sheet to make a loan to Marquis.When the firm defaults,Pure Credit files a suit against Nan & Ollie.Under the Ultramares rule,the accounting firm is most likely

A)liable because Nan & Ollie owed a duty of care to all third parties.
B)liable because Nan & Ollie owed a duty of care to Marquis.
C)liable because Nan & Ollie owed a duty to any foreseeable user.
D)not liable because Nan & Ollie and Pure Credit were not in privity.

Question 57

Quin,an accountant,prepares for Reddy,Inc. ,a financial statement that omits a material fact.The statement is included in Reddy's registration statement with the Securities and Exchange Commission.Timor,who reads the statement,and Ubi,who does not,each buy Reddy stock.Velma reads the statement but does not buy the stock.Under Section 11 of the Securities Act of 1933,Quin may be liable to

A)no one.
B)Timor and Ubi.
C)Timor,Ubi,and Velma.
D)Ubi only.

Question 58

Pluto accuses Quark,an accountant,of committing defalcation.This is

A)embezzlement.
B)general misconduct.
C)professional negligence.
D)throwing something out of a window.

Question 59

Lebron,an attorney,allows a statute of limitations to lapse on a claim by Midwest Metal Fabrication Company,a client.Lebron

A)can be held liable for malpractice.
B)has violated an ethical standard but cannot be held liable.
C)is subject to criminal penalties under the statute of limitations.
D)will be automatically disbarred.

Question 60

Filtration Products,Inc. ,files a suit against Emmett,its former accountant,alleging constructive fraud.Emmett may be held liable

A)if Filtration cannot prove actual fraud.
B)if Emmett was grossly negligent in the performance of his duties.
C)only if Emmett acted with fraudulent intent.
D)only if Emmett impersonated someone else who could be liable for fraud.

Question 61

Meri,an accountant,includes a false statement in a report for Novelty Paper Products,Inc.(NPPI)that is filed with the Securities and Exchange Commission.When Otho buys stock in NPPI and loses money on the investment,he files a suit against Meri,alleging fraud under the 1934 Securities Exchange Act.To avoid liability,Meri can show that she

A)intended to defraud NPPI,not Otho.
B)intended to profit on stock trades generally,not only with Otho.
C)is an otherwise competent accountant.
D)was not aware her statement was false.

Question 62

Bowie,a certified public accountant,prepares and certifies Candy Products Corporation's financial statements.These statements are included in Candy's registration statement filed with the Securities and Exchange Commission before Candy's offering of securities.Dona buys a security covered by the registration statement.Based on this transaction,Dona files a suit against Bowie under Section 11 of the Securities Act of 1933 and Section 10(b)of the Securities Exchange Act of 1934.To succeed in the suit,what must Dona prove? Bowie responds that Dona was not in privity with him and that even if she had been in privity,she cannot prove his lack of due diligence.Can Bowie prevail on these grounds? Why or why not?

Question 63

Flynn,an accountant,helps Grange Supply Company prepare and file a false federal corporate income tax return.Under the Internal Revenue Code,this is

A)a felony punishable by a fine and imprisonment.
B)a felony punishable only by a fine.
C)a misdemeanor punishable only by a fine.
D)a civil violation subject to a liability suit but not a crime.

Question 64

Pace is an attorney,whose clients include Quikfeet Running Shoes Company.Unless Quikfeet has violated securities law,the contents of Pace's file on Quikfeet may be disclosed to someone other than Quikfeet

A)only to a third party who is a foreseeable user of the information.
B)only under a court order (with or without Quikfeet's consent).
C)only with Quikfeet's consent.
D)under any circumstances.

Question 65

Pat,an accountant,includes a false statement in a report for Quantity Overstock,Inc. ,that is filed with the Securities and Exchange Commission.Quantity publishes a misleading ad about its future prospects.Rita sees the ad and calls Stan,who buys stock in Quantity.Under Section 18 of the Securities Exchange Act of 1934,liability may attach to

A)Pat's report.
B)Quantity's ad.
C)Rita's call.
D)Stan's purchase.

Question 66

Dominique,a certified public accountant,provides accounting services to Eagle Corporation.The services include preparing Eagle's financial reports and issuing opinion letters based on the reports.In 2008,Eagle falls into serious financial trouble,but neither Dominique's reports nor her opinion letters indicate this situation.Relying on Dominique's portrayal of Eagle's financial situation,Eagle borrows a large sum of money to build a new shipping facility.In lending Eagle the money,First National Bank relies on Dominique's opinion letter.Dominique is aware of this reliance.If Dominique did not engage in intentional fraud but was negligent,what is her potential liability?

Question 67

Bryce's accountant is Caleb and his attorney is Delilah.All states protect,as privileged information,Bryce's communications with

A)Caleb and Delilah.
B)Caleb only.
C)Delilah only.
D)neither Caleb nor Delilah.

Question 68

Beth is an accountant with Coffee Sales Corporation.Doral buys Coffee Sales stock and loses money on the investment.To recover from Beth under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5,Doral must prove

A)none of the choices.
B)fraud and reliance only.
C)fraud,reliance,and materiality only.
D)scienter,fraud,reliance,materiality,and causation only.

Question 69

Longway Trucking,Inc. ,files a suit against Midge,an accountant,under the antifraud provisions of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission.To succeed in recovering damages,Longway must show that Midge

A)acted with scienter.
B)bought or sold a security.
C)is incompetent.
D)knows nothing about securities.

Question 70

Lacy is an accountant who prepares her clients' tax returns.Muff is not an accountant,but he also prepares tax returns for clients.Under the Internal Revenue Code,liability for preparing a false return may be imposed on

A)Lacy and Muff.
B)Lacy only.
C)Muff only.
D)neither Lacy nor Muff.

Question 71

Feder prepares federal corporate income tax returns for Giant Stores,Inc. ,and other firms.Under the Internal Revenue Code,with respect to an understatement of a client's tax liability,Feder may be liable for

A)negligent or willful misconduct.
B)no misconduct.
C)only negligent misconduct.
D)only willful misconduct.

Question 72

Jerzy is an accountant whose clients include Kopper Kettle Restaurants,Inc.For a violation of securities laws,Jerzy may be subject to

A)comprehensive liability.
B)corporate liability.
C)criminal liability.
D)no liability.