Deck 27: Accountants Liability

Question 1

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

Answer 1

False

Question 2

Ralco was preparing Heidi's tax return. In confidence, Heidi revealed some information to Ralco. Under the federal accountant-client privilege, the information Heidi disclosed is protected from disclosure in a criminal action by the U.S. government.

Answer 2

False

Question 3

One of the accountant's most important roles is to serve as an independent evaluator of the financial statements issued by management to investors and creditors.

Answer 3

True

Question 4

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

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 Section 11 of the 1933 Act, 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

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 8

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 9

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 10

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.

Question 11

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 Section 10(b) of the 1934 Act, the auditor is required to notify E-prise's board of directors of the suspicions.

Question 12

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

Question 13

Halbeck, LLC was negligent in its audit of E-treme, Inc. Unbeknownst to Halbeck, E-treme used the financial statements to secure a loan from Great State Bank. Under the foreseeable doctrine, Halbeck will be liable to Great State Bank for its losses on the loan.

Question 14

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 15

Halbeck, LLC was negligent in its audit of E-treme, Inc. Unbeknownst to Halbeck, E-treme used the financial statements to secure a loan from Great State Bank. Under the Ultramares doctrine, Halbeck will be liable to Great State Bank for its losses on the loan.

Question 16

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

Question 17

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 18

Accounting contracts can be either written or oral.

Question 19

Auditors cannot protect themselves from liability to third parties by issuing a qualified or an adverse 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

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 22

Rick prepared financial statements for MegaCorp knowing that it was going to use his statements to apply for a loan with Big Bank. When Big Bank turned MegaCorp down, it applied to Fourth Bank for a loan. MegaCorp presented the statements prepared by Rick to Fourth Bank, which gave the company a loan. It was discovered that Rick was negligent in preparing the statements, and Fourth Bank sued Rick. Under which of the following tests is Rick liable?

A) Ultramares doctrine
B) Foreseeable doctrine
C) Restatement doctrine
D) Both the foreseeable doctrine and the Restatement doctrine

Question 23

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 24

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.

Question 25

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 26

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

Question 27

The IRS files criminal charges against Rich for evasion of federal taxes. Rich's accountant, Sonya, is summoned to appear in court to testify against Rich. The state where the incident occurred recognizes an accountant-client privilege. Does Sonya have to testify in federal court against her client?

A) Yes.
B) Yes, but only if she is granted immunity by her state.
C) No, the federal court must recognize her state's accountant-client privilege.
D) No, the federal accountant-client privilege will protect her from testifying.

Question 28

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 29

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.

Question 30

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 31

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 32

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 33

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 34

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 35

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 36

The Big Four accounting firms spend about what percentage of their revenue on litigation, including settlements and insurance?

A) less than five percent
B) between 10 and 20 percent
C) between 25 and 35 percent
D) over 50 percent

Question 37

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 38

Sally prepared financial statements for MegaCorp knowing that the company would be using her statements when applying for a loan at Big Bank. It is discovered she was negligent in preparing the statements, and Big Bank sues her. Sally is liable under the

A) Ultramares doctrine.
B) Foreseeable doctrine.
C) Restatement doctrine.
D) All of these are correct.

Question 39

If a plaintiff is successful in proving that an auditor has violated Section 10(b) of the 1934 Securities Exchange Act, the auditor has

A) primary liability.
B) secondary liability.
C) contingent liability.
D) rebuttable liability.

Question 40

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 41

Ron is an accountant who was contacted by Zebra Toy Company to prepare financial statements. Zebra Toy Company told Ron that it wished to present these documents to Lion Wholesalers, Inc., a large supplier of toys. If Lion is convinced that Zebra Toy Company is financially solid, it will issue Zebra a large line of credit.
After Ron prepares the financial documents, Zebra presents the information to Lion Wholesalers and also to Tiger Toy Company, another wholesaler of toys. Zebra wishes to obtain a line of credit from Tiger as well as from Lion. If Ron committed a serious error by overstating Zebra Toy Company's financial soundness and the two creditors, Lion and Tiger, are damaged as a result, can these third parties recover damages from Ron? Explain.

Question 42

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

Question 43

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 44

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 45

Nancy is an auditor. She works in a state that uses the Ultramares Doctrine. She fraudulently prepared financial documents for her client, Star, Inc. Her client presented the information to Moonglow, Inc. Moonglow was a potential creditor of Star, Inc., and was seriously damaged by the fraudulent financial information. Moonglow sued Nancy. She claims she is not liable to Moonglow, a third party, since she was not provided with its name at the time the audit was prepared. Is she liable to Moonglow? Explain.