Deck 51: Professional Liaility and Accountability

Question 1

At common law, professionals may be liable to clients for negli?gence.

Answer 1

True

Question 2

A professional who intentionally misstates a material fact to mislead a client may be liable for actual fraud.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

A professional's failure to perform a duty, with reckless disregard of the conse?quences, constitutes actual fraud.

Question 8

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

Question 9

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

Question 10

Each state establishes rules that govern the conduct of attorneys

Question 11

Professionals can limit their liability for the misconduct of other profes?sionals with whom they work.

Question 12

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

Question 13

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

Question 14

At common law, professionals may be liable to clients for breach of contract.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

The liability of professionals is based solely on common law.

Question 21

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

Question 22

A professional whose client justifiably relies on the professional's mis?statement may be liable for constructive fraud.

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

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

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

Question 31

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

Question 32

Accountants are not subject to criminal penalties for violations of federal securities laws.

Question 33

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

Question 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

Yvon is an accountant charged by Zesty Sales, Inc., a client, with negli?gence. 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 43

Tom is an attorney. Tom's conduct is governed by rules of professional conduct established by the state in which he is licensed, and the Code of Professional Responsibility and Model Rules of Professional Conduct drafted by

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

Question 44

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 45

Tony is an accountant whose clients include U-All Company. If Tony 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 46

Jim, an attorney, allows a statute of limitations to lapse on a claim by Midwest Manufacturing Company, a client. Jim

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 47

Delta Products, Inc., files a suit against Evan, its former accountant, al?leging constructive fraud. Evan may be held liable

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

Question 48

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

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

Question 49

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

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

Question 50

Jody is an attorney. Kelvin is a certified public accountant. At com?mon law, Jody and Kelvin may be liable to clients for

A) breach of contract, negligence, or fraud.
B) breach of contract or negligence only.
C) breach of contract only.
D) nothing.

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

Quibble 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 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 53

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 54

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 55

Dan and Eve are accountants who work together. Dan and Eve can limit their potential liability for each other's misconduct by organizing their business as

A) a limited liability partnership only.
B) a professional corporation only.
C) either a limited liability partnership or a professional corporation.
D) neither a limited liability partnership nor a professional corporation.

Question 56

Lee, 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 57

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 58

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 accountant's performance.
C) an attorney's performance.
D) any client or professional's performance.

Question 59

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 for 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 60

National Business Systems Corporation (NBS) files a suit against Molly, its former accountant, alleging constructive fraud. NBS need not prove

A) detrimental reliance.
B) intent to deceive.
C) justifiable reliance.
D) materiality.

Question 61

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 62

Lara, an accountant, conducts an audit of Microstuff, 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 63

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 64

Lebron 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 65

Longhaul, 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, Longhaul must show that Midge

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

Question 66

Pat, an accountant, includes a false statement in a report for Quantity, 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 67

Bertha is an accountant with Consumer Sales Corporation. Doral buys Consumer 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 68

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 69

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 70

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 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 71

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 72

Craig is an accountant whose clients include Digby National Corporation. Elbert is Craig's attorney. 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 73

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.

Question 74

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 75

Nina, an accountant, prepares for Opal Corporation a financial state?ment that misstates a material fact. The statement is included in Opal's regis?tration statement. Pete, who is in privity with Nina, and Quinn, who is not, each buy Opal stock. Under Section 11 of the Securities Act of 1933, Nina may be liable to

A) neither Pete nor Quinn.
B) Pete and Quinn.
C) Pete only.
D) Quinn only.

Question 76

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 77

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 78

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 79

Rollo is an attorney whose clients include Superior Company. If Rollo is negligent in his work for Superior, under the Restatement (Second) of Torts, Rollo may be liable to Superior and

A) any third party.
B) no third party.
C) third parties who are foreseen users of the work only.
D) third parties who are reasonably foresee?able users of the work.

Question 80

Quin, an accountant, prepares for Reddy, Inc., a financial state?ment 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. Under Section 11 of the Securities Act of 1933, Quin may be liable to

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