Deck 51: Accountants Duties and Liability

Question 1

Which of the following statements is true of accountants?

A) Accountants cannot be hired to perform nonaudit services.
B) Accountants cannot be held liable by provisions of common law.
C) Accountants can be held liable to clients but not to third parties.
D) Accountants who lack certified public accountant (CPA) certification are called public accountants.

Answer 1

D

Question 2

A(n) ________ is an auditor's opinion that states that the financial statements are fairly represented except for, or subject to, a departure from Generally Accepted Accounting Principles (GAAPs), a change in accounting principles, or a material uncertainty.

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

Answer 2

B

Question 3

Limited partners are personally liable for the debts and obligations of the limited liability partnerships (LLP).

Answer 3

False

Question 4

An auditor's opinion that the company's financial statements fairly represent the company's financial position, the results of its operations, and the change in cash flows for the period under audit, in conformity with generally accepted accounting principles is referred to as a(n) ________.

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

Question 5

If an auditor makes a disclaimer of opinion, this means that the auditor is ________.

A) favorable to the company's financial statement matching its performance but notes a few departures from Generally Accepted Accounting Principles (GAAPs)
B) unfavorable about the financial statement representing the company's position
C) unable to draw a conclusion about the accuracy of the company's financial records owing to lack of information
D) favorable of the company's financial statements representing its performance

Question 6

Which of the following statements is true of the generally accepted accounting principle (GAAP)?

A) It is used by auditors as a guide for their nonaudit services only.
B) It is the accepted form of accounting principles around the world.
C) It cannot be modified once established by the American Institute of Certified Public Accountants.
D) It sets rules for how corporations must set their accounts on their financial statements.

Question 7

Standards for the preparation and presentation of financial statements are known as ________.

A) engagements and agreements
B) auditor's opinions
C) generally accepted accounting principles
D) generally accepted auditing standards

Question 8

The Financial Accounting Standards Board (FASB) issues new Generally Accepted Accounting Principle (GAAP) rules and amends existing ones.

Question 9

Which of the following opinions is necessary for a company to avoid unfavorable repercussions on the company?

A) an adverse opinion
B) a qualified opinion
C) a disclaimer of opinion
D) an unqualified opinion

Question 10

Which of the following is the most common type of corporate structure that is used by accounting firms that operate in the United States?

A) a limited liability partnership
B) a corporation
C) a cooperative
D) a sole trader

Question 11

Generally Accepted Accounting Principles (GAAPs) specify the methods and procedures that are to be used by public accountants when conducting external audits of company financial statements.

Question 12

The Generally Accepted Auditing Standards (GAASs) are established by the American Institute of Certified Public Accountants.

Question 13

Which one of the following is the most favorable opinion an auditor can give a company following an audit?

A) an unqualified opinion
B) a disclaimer of opinion
C) an adverse opinion
D) a qualified opinion

Question 14

Most accounting firms in the United States operate as limited liability partnerships (LLPs).

Question 15

________ specify the methods and procedures that are to be used by public accountants when conducting external audits of company financial statements

A) Generally accepted accounting principles
B) Generally accepted auditing standards
C) Auditor's expert opinions
D) General engagements and agreements

Question 16

Holly Lane is an accountant with Mildred & Lane Co. and she has recently been asked to visit Maine Manufacturers to survey their financial records, assess their compliance with federal and state laws, and provide an opinion reflecting the state of the company's financial records. Holly's assessment of the financial records of Maine Manufacturers is called a(n) ________.

A) probate
B) audit
C) arraignment
D) easement

Question 17

A person who practices as an accountant, but is not certified, is referred to as a public accountant.

Question 18

Which of the following opinions would an auditor make for a company that, he or she feels, has materially misstated certain items on its financial statements?

A) an unqualified opinion
B) an adverse opinion
C) a qualified opinion
D) a disclaimer of opinion

Question 19

Which of the following is true of an auditor of a corporation?

A) The auditor must be an independent certified public accountant.
B) The auditor cannot use information about the corporation from third parties.
C) The auditor cannot inspect the corporation's real property unless he is closely associated with the company.
D) The auditor must provide a qualified opinion wherever possible since it helps the company in business.

Question 20

A qualified opinion can be defined as a verification of a company's books and records by a certified accountant.

Question 21

Which of the following legislations can a state adopt in determining whether an accountant is liable in negligence to third parties?

A) Section 2(b) of the Robinson-Patman Act
B) Section 5 of the Federal Trade Commission
C) Section 552 of the Restatement (Second) of Torts
D) Section 16 of the Clayton Act

Question 22

Violations of generally accepted accounting principles (GAAPs) or generally accepted auditing standards (GAASs), or International Financial Reporting Standards (IFRSs), if applicable, are prima facie evidence of negligence in any court action.

Question 23

Which of the following rules provides that an accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client's financial statements?

A) Section 552 of the Restatement (Second) of Torts
B) the foreseeability standard
C) the Ultramares doctrine
D) due diligence defense

Question 24

An adverse opinion is reflective of a material misstatement or discrepancy in a company's financial records.

Question 25

A(n) ________ is defined as intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damage.

A) unqualified opinion
B) actual fraud
C) disclaimer of opinion
D) constructive fraud

Question 26

A formal entrance into a contract between a client and an accountant is called abatement.

Question 27

When does an auditor submit a disclaimer of opinion? What is the significance of an auditor's opinion?

Question 28

A qualified opinion is the most favorable opinion that an accountant can render.

Question 29

A formal entrance into a contract between a client and an accountant is known as an ________.

A) abatement
B) arraignment
C) easement
D) engagement

Question 30

A rule that says that an accountant is liable for negligence to third parties who are projected users of the client's financial statements is known as ________.

A) the foreseeability standard
B) the Ultramares doctrine
C) the due diligence defense
D) the privity of contract

Question 31

An accountant's failure to follow the Generally Accepted Auditing Standards (GAASs) when conducting audits constitutes negligence.

Question 32

An unqualified opinion would entail that the company's financial statements have some deviation from Generally Accepted Accounting Principles (GAAPs).

Question 33

When an accountant has behaved negligently causing damage to a third party, the third party ________.

A) cannot sue the accountant under any circumstance
B) cannot bring a tort action against the accountant to recover damages
C) cannot sue the accountant for breach of contract
D) cannot claim constructive but not actual fraud on part of the defendant

Question 34

Accountants can be held liable for negligence in preparing unaudited financial statements.

Question 35

In the case of Ultramares Corporation vs. Touche, the defendant was found to be not guilty of negligence due to lack of privity of contract.

Question 36

Which of the following provides the broadest standard for holding accountants liable to third parties for negligence?

A) due diligence defense
B) the foreseeability standard
C) the Ultramares doctrine
D) nolo contendere

Question 37

Constructive fraud is defined as intentional misrepresentation or omission of a material fact that is relied on by a client and causes the client damage.

Question 38

The Ultramares doctrine provides the broadest standard for holding accountants liable to third parties for negligence.

Question 39

The ________ is a rule that says that an accountant is liable only for negligence to third parties who are in privity of contract or in a privity-like relationship with the accountant.

A) foreseeability standard
B) Ultramares doctrine
C) due diligence defense
D) disclaimer of opinion

Question 40

A disclaimer of opinion is a clause in auditing that a company can claim wherein the auditor is not allowed to access a high-priority portion of a company's financial records.

Question 41

________ imposes civil liability on accountants and others for making misstatements or omissions of material facts in a registration statement, or failing to find such misstatements or omissions.

A) Section 11(a) of the Securities Act of 1933
B) Section 10A of the Securities Exchange Act of 1934
C) Section 101 of the Uniform Securities Act
D) Section 18(a) of the Securities Exchange Act of 1934

Question 42

Only purchasers and sellers of securities can sue under Section 10(b) and Rule 10b-5.

Question 43

Why do accountants come under the purview of Section 18(a) of the Securities Exchange Act of 1934?

A) because they often file reports and other documents with the Securities and Exchange Commission (SEC) on behalf of clients
B) because certified public accountants (CPAs) are directly employed by the Securities and Exchange Commission (SEC)
C) because all companies require an accountant's approval before buying securities from the Securities and Exchange Commission (SEC)
D) because securities can only be bought through a certified public accountant (CPA)

Question 44

Under the foreseeability standard, an accountant is liable even if he or she had no knowledge of the intended user of the audited financial statements.

Question 45

In which of the following ways can an accountant defeat the imposition of liability under Section 18(a)?

A) if he or she can show that the misleading statement was made to protect the company from bankruptcy
B) if he or she had acted out of recklessness
C) if he or she was an employee to the plaintiff
D) if he or she can show that the plaintiff had knowledge of the false statement

Question 46

The legal theory that holds accountants liable to any member of a limited class of intended users for whose benefit the accountant has been employed is the Section 552 of the Restatement (Second) of Torts.

Question 47

Pursuant to federal securities laws, an audit must be performed by a certified public accountant (CPA) who works closely with the company in the capacity of a chief executive officer (CEO) or a chief financial officer (CFO).

Question 48

Third parties cannot sue accountants for breach of contract.

Question 49

Explain Section 552 of the Restatement (Second) of Torts.

Question 50

Which of the following is true of Section 10A of the Securities Exchange Act of 1934?

A) It prohibits any manipulative or deceptive practice in connection with the process of the probate.
B) It serves as a defense an accountant can assert by claiming due diligence to avoid civil liability.
C) It enforces a duty on auditors to detect and report illegal acts committed by their clients.
D) It imposes a criminal liability on accountants for making misstatements or omissions in nonaudit services.

Question 51

The Securities Act of 1933 requires that before a corporation or another business sells securities to the public, the issuer must file a registration statement with the Securities and Exchange Commission (SEC).

Question 52

________ is a law that prohibits any manipulative or deceptive practice in connection with the purchase or sale of a security.

A) Section 11(a) of the Securities Act of 1933
B) Section 32(a) of the Securities Exchange Act of 1934
C) Section 10(b) of the Securities Exchange Act of 1934
D) Section 101 of the Uniform Securities Act

Question 53

Ordinary negligence by an accountant is not a violation of Section 10(b) and Rule 10b-5.

Question 54

________ is a rule that limits a defendant's accountability to his or her equivalent degree of fault.

A) Privity of contract
B) Due diligence defense
C) Proportionate liability
D) Ultramares doctrine

Question 55

Which of the following can be used by an accountant to counter liability imposed under Section 11(a) of the Securities Act of 1933?

A) the nolo contendere rule
B) the due diligence defense
C) the Ultramares doctrine
D) the foreseeability standard

Question 56

Which of the following legislations makes it a criminal offense to willfully make any untrue statement of material fact in a registration statement filed with the SEC?

A) Section 24 of the Securities Act of 1933
B) Tax Reform Act of 1976
C) Private Securities Litigation Reform Act of 1995
D) Section 10(b) of the Securities Exchange Act of 1934

Question 57

A due diligence defense cannot be asserted by an accountant against the civil liabilities of Section 11(a) of the Securities Act of 1933.

Question 58

A verification of a company's books and records pursuant to federal securities laws, state laws, and stock exchange rules that must be performed by an independent certified public accountant (CPA) is known as a(n) ________.

A) probate
B) ademption
C) audit
D) deposition

Question 59

A third party can bring a tort action against an accountant in case of constructive fraud.

Question 60

Which of the following is true of Rule 10b-5?

A) Privity of contract is a necessity for bringing a lawsuit under this rule.
B) Civil private lawsuits are not permitted under this rule.
C) Only purchasers and sellers of securities can sue under this rule.
D) Ordinary negligence is a violation of this rule.

Question 61

Give an account of the Private Securities Litigation Reform Act of 1995.

Question 62

Which of the following is true of the Public Company Accounting Oversight Board?

A) All members of the Public Company Accounting Oversight Board have to be certified public accountants (CPAs).
B) The Public Company Accounting Oversight Board was created by the Tax Reform Act of 1976.
C) The Securities and Exchange Commission (SEC) has oversight and enforcement authority over the board and its functioning.
D) The Public Company Accounting Oversight Board lacks the power to initiate any disciplinary actions against defaulting accountants.

Question 63

The ________ Act of 1976 specifically imposes penalties and fines for the willful understatement of a client's tax liability.

A) Tax Reform
B) Racketeer Influenced and Corrupt Organizations
C) Private Taxation Litigation Reform
D) Uniform Securities

Question 64

Under the Sarbanes-Oxley Act, in order to audit a public company, ________.

A) only public accountants must constitute the audit committee
B) a public accounting firm must register with the Public Company Accounting Oversight Board (PCAOB)
C) all public accounting firms must assign an accountant who works closely with one client over a long duration of time
D) the law of accountant-client privilege must be accepted by the state legislative mechanism

Question 65

Accountants can be named as defendants in lawsuits that assert violations of the Racketeer Influenced and Corrupt Organizations Act (RICO).

Question 66

A private civil Racketeer Influenced and Corrupt Organizations Act (RICO) based on securities fraud can only be brought once the defendant has been convicted for the crime.

Question 67

The Securities and Exchange Commission (SEC) has the power to file criminal charges and award punishment for violations that come under Section 32(a) of the Securities Exchange Act of 1934.

Question 68

Registered accounting firms that audit more than 100 public companies annually are subject to inspection and review by the Public Company Accounting Oversight Board (PCAOB) once a year.

Question 69

The Securities Exchange Commission (SEC) has oversight and enforcement authority over the Public Company Accounting Oversight Board (PCAOB).

Question 70

All members of the Public Company Accounting Oversight Board (PCAOB) have to be certified public accountants (CPAs).

Question 71

Which of the following is a necessity to bring a private civil action against a violator of Racketeer Influenced and Corrupt Organizations Act (RICO) based on securities fraud?

A) The accountant must not be a third-party independent contractor.
B) The defendant has to be first criminally convicted in connection with the securities fraud.
C) The plaintiff should file the case before the government brings a lawsuit.
D) The defendant has to be tried by the application of the Section 32(a) of the Securities Exchange Act of 1934 first.

Question 72

Accountants cannot be held criminally liable for material irregularities in financial statements prepared for registration statements.

Question 73

The Private Securities Litigation Reform Act of 1995 replaced proportionate liability of the defendant with joint and several liability.

Question 74

What prohibition does the Sarbanes-Oxley Act impose on an accounting firm providing audit and nonaudit services to the same company?

Question 75

The accountant-client privilege is a law that entails that ________.

A) only an accountant can serve as a witness for the client in a court action
B) only an accountant's paperwork be taken as prima facie evidence against a client in a court action
C) an accountant cannot be called as a witness against a client in a court action
D) an accountant does not enjoy work product immunity when a client is accused of gross negligence

Question 76

The Tax Reform Act of 1976 created the Public Company Accounting Oversight Board (PCAOB).

Question 77

Federal law allows for discovery of an accountant's work papers in a federal case against the accountant's client.

Question 78

The Sarbanes-Oxley Act makes it lawful for an accounting firm to simultaneously provide audit and certain nonaudit services to a public company if the firm is registered.

Question 79

The Sarbanes-Oxley Act of 2002 prohibits the employment of an accountant by a previous audit client for five years after the first appointment.

Question 80

Which of the following legislations provides for both civil and criminal penalties, including up to recovering treble damages, for securities fraud by accountants?

A) Private Securities Litigation Reform Act of 1995
B) Section 32(a) of the Securities Exchange Act of 1934
C) Tax Reform Act of 1976
D) Racketeer Influenced and Corrupt Organizations Act