Deck 34: Liability of Accountants Other Professionals

Question 1

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

Answer 1

True

Question 2

Traditionally,a professional owed a duty only to those with whom the professional had a direct contractual relationship.

Answer 2

True

Question 3

A client's negligence may constitute a defense to a charge of negligence against an accountant.

Answer 3

True

Question 4

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

Question 5

Gen?erally ac?cepted accounting principles represent guidelines rather than a standard of care.

Question 6

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

Question 7

Professionals can limit their liability for the misconduct of other profes?sionals with whom they work to some extent by disclaiming it.

Question 8

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

Question 9

Under the Restatement (Second)of Torts,accountants can be held li?able for negligence to any third parties.

Question 10

A professional cannot be liable for fraud in the absence of fraudulent intent.

Question 11

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

Question 12

Gen?erally ac?cepted auditing standards represent guidelines rather than standards of care.

Question 13

Each state establishes rules that govern the conduct of attorneys

Question 14

An accountant's violation of generally accepted accounting principles is prima facie evidence of negligence.

Question 15

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

Question 16

A professional owes a duty to his or her client to honor the terms of their contract.

Question 17

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

Question 18

With respect to negligence,an accountant is subject to no greater stan?dard of care than a person who is not an accountant.

Question 19

The liability of professionals is based solely on common law.

Question 20

In most courts,accountants can be liable for negligence to any known us?ers of the accountants' finan?cial reports.

Question 21

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 22

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

Question 23

An accountant who prepares a financial state?ment in good faith may avoid liability under Section 18 of the Securities Ex?change Act of 1934.

Question 24

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

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

Under the Securities Exchange Act of 1934,an accountant may be liable for a misleading statement that affects the price of a security even if the accountant acted in good faith.

Question 27

Travis,an accountant,is subject to the ac?counting conventions,rules,and procedures that constitute generally ac?cepted accounting principles (GAAP).GAAP are determined by

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

Question 28

Aiding or assisting in the preparation of a false tax return is a felony.

Question 29

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

Question 30

A public accounting firm is a firm engaged in the practice of accounting "in the public interest."

Question 31

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

Question 32

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

Question 33

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 34

Under the Sarbanes-Oxley Act of 2002,an accountant must destroy working papers on the conclusion of the audit to which the papers relate.

Question 35

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 36

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 37

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

Question 38

In a few states,communications between an accountant and his or her client are privileged.

Question 39

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 40

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

Question 41

Lulu,an accountant,conducts an audit of Microstuff Toys,Inc.After the conclu?sion 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 42

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 43

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 44

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 45

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 foresee?able users of his work for EPI.
D) EPI only.

Question 46

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 47

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

A) a client's performance.
B) an attorney's performance.
C) anyone's performance.
D) no one's performance.

Question 48

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 49

Yvon,an accountant,is charged with negli?gence by Zesty Sauce,Inc.,a client.Yvon may successfully defend against the claim if she can show that

A) scienter was lacking.
B) she complied with all generally accepted accounting principles.
C) the negligence was not the proximate cause of the client's losses.
D) the negligence was only contributory.

Question 50

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 51

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 52

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 foresee?able users of the work.

Question 53

Quentin,an accountant,prepares for Ruff n' Reddy Concrete Corporation a financial state?ment that omits a material fact.The statement is included in Ruff n' Reddy's registration statement filed with the Securities and Exchange Commission.Timor,who reads the statement,and Ubi,who does not,each buy Ruff n' Reddy stock.Under Section 11 of the Securities Act of 1933,Quentin may be liable to

A) neither Timor nor Ubi.
B) Timor and Ubi.
C) Timor only.
D) Ubi only.

Question 54

Grover Nut Company files a suit against Hud,its former account?ant,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 55

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 56

Daisy Daycare,Inc.,files a suit against Eldon,its former accountant,al?leging constructive fraud.Eldon may be held liable

A) if Daisy cannot prove actual fraud.
B) if Eldon was grossly negligent in the performance of his duties.
C) only if Eldon acted with fraudulent intent.
D) only if the court adopts the Ultramares rule.

Question 57

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 58

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

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

Question 59

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 60

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 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 Com?mission.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

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 63

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 In?ternal Revenue Code,liability for preparing a false return may be im?posed on

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

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

Bowie,a certified public accountant,prepares and certifies Candy Products Corporation's financial statements. These statements are in?cluded 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 priv?ity 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 66

Bertha is an accountant with Chocolate Shoppes Corporation.Doral buys Chocolate stock and loses money on the investment.To recover from Bertha under Section 10(b)of the Securities Exchange Act of 1934 and Rule 10b-5 of the Se?curities and Exchange Commission,Doral must prove

A) nothing.
B) scienter, fraud, and reliance only.
C) scienter, fraud, reliance, and materiality only.
D) scienter, fraud, reliance, materiality, and causation.

Question 67

Pat,an accountant,includes a false statement in a report for Quantity Overstock,Inc.,that is filed with the Securities and Exchange Commis?sion.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 Ex?change Act of 1934,liability may attach to

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

Question 68

Flynn,an accountant,helps Grange Supply Company prepare and file a false federal corporate income tax return.Under the In?ternal 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 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

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 71

Dominique,a certified public accountant,provides accounting serv?ices to Eagle Corporation.The services include preparing Eagle's financial re?ports and issuing opinion letters based on the reports.In 2008,Eagle falls into serious financial trouble,but neither Dominique's reports nor her opinion let?ters indicate this situation.Relying on Dominique's portrayal of Eagle's finan?cial situation,Eagle borrows a large sum of money to build a new ship?ping 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 en?gage in intentional fraud but was negligent,what is her potential liability?

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.