Deck 46: Legal and Professional Responsibilities of Auditors, Consultants, and Securities Professionals

Question 1

Under two of the subsections of Section 17(a)of the Securities Act of 1933,an investor need prove only negligence by the accountant.

Answer 1

True
Explanation: Under two of the subsections of Section 17(a)of the Securities Act of 1933,an investor need prove only negligence by the accountant,underwriter,broker,or adviser.

Question 2

An accountant performing an audit of a client has a specific duty to uncover an employee's embezzlement from the client.

Answer 2

False
Explanation: Ordinarily,an accountant has no specific duty to uncover employee fraud or embezzlement.

Question 3

Under Section 11 of the Securities Act of 1933,an underwriter is liable for errors in the entire registration statement because an underwriter is an expert.

Answer 3

False
Explanation: Because the underwriter is not an expert under Section 11 of the Securities Act of 1933,the underwriter is liable for errors in the entire registration statement.Since an auditor is an expert,the auditor is liable only for the part of the registration statement contributed by the auditor because an auditor is an expert.

Question 4

The duty of trust requires a professional to maintain confidentiality.

Question 5

Joe Smith is a recent graduate from Sunset College.While at Sunset College,he majored in Business.In his interview for an auditor position at Supermart Inc. ,Mr.Smith convinced the hiring manager he knew enough accounting to perform the job,but in fact,Mr.Smith does not understand Generally Accepted Auditing Standards (GAAS).Mr.Smith has failed to show professional care and could be liable for his actions as an auditor because of his lack of skills.

Question 6

If a state recognizes a privilege,like accountant-client privilege,then the federal courts in that jurisdiction will also allow that privilege.

Question 7

An accountant can be required to bring his/her working papers into court and to testify as to matters involving the client's tax records and discussions with the client regarding tax matters.

Question 8

The professional's duty to exercise reasonable care is a subset of the negligence standard of tort law.

Question 9

Professionals' tort liability to their clients may be based only on the common law concepts of negligence and fraud.

Question 10

Usually,only clients sue professionals under the securities law.

Question 11

Under Section 11 of the Securities Act of 1933,an auditor may escape liability by proving he/she had no reason to believe and did not believe that there were any misstatements or omissions of material fact in the financial statements he/she audited.

Question 12

A professional may delegate his/her duty without the consent of the client.

Question 13

Mr.Blue is a very good accountant at Supermart Inc.Mr.Blue acts with great care and accuracy.But with changing laws and various inaccurate information provided to him by other employees,Mr.Blue is responsible for Supermart owing the IRS $50,000.The CEO of Supermart wants to discharge and sue Mr.Blue for failure to exercise professional care (i.e. ,professional negligence).Mr.Blue is liable for professional negligence and can be discharged and sued for the mistake.

Question 14

Courts and legislatures in dealing with professional negligence usually defer to the members of a profession to determine what the professional standard should be.

Question 15

Proof of aiding and abetting another person's securities violation is not sufficient misconduct to overcome the privity requirement of Section 12(a)(2)of the Securities Act of 1933.

Question 16

The Securities Exchange Act of 1934 does not impose any criminal liability for violation of any of its provisions.

Question 17

Under the Sarbanes-Oxley Act of 2002,public accounting firms that audit financial statements of public companies are required to register with the Public Company Accounting Oversight Board and submit to its rules.

Question 18

The general duty of professionals requires them to be guarantors of the accuracy of their work.

Question 19

By issuing a qualified opinion,an auditor escapes liability for defects in financial statements audited by the auditor.

Question 20

The work papers and documents that a professional receives from a client to perform services like auditing or accounting will remain the property of the client.

Question 21

Usually,a client may receive ________ damages for a breach of contract or negligence.

A)only consequential
B)only punitive
C)consequential and punitive
D)only compensatory

Question 22

The central requirement for the primary benefit test is:

A)breach of contract.
B)fraud.
C)privity of contract.
D)breach of trust.

Question 23

Judge Blue is evaluating a case of professional negligence involving a claim against an auditor.Where will Judge Blue look to determine what the ordinary standard of care is for the auditing profession?

A)The auditing industry,in particular the Generally Accepted Auditing Standards (GAAS)and any other standards the industry has implemented.
B)The United States Department of Labor.
C)The Secretary of State office in the state where the business is incorporated.
D)The shareholders of the corporation in questioned.

Question 24

Which of the following tests requires a professional to know the name of the nonclient who will use his/her work product and the particular purpose for which that person will use the work product?

A)Restatement test
B)Primary benefit test
C)Foreseeable users test
D)Scienter test

Question 25

Professionals are sued under securities law usually by:

A)clients.
B)brokers.
C)partners.
D)third parties.

Question 26

Which of the following professional liabilities is based on the common law concepts of negligence?

A)Penal liability
B)Tort liability
C)Primary liability
D)Contractual liability

Question 27

Which of the following is authorized to conduct periodic inspections of nonprivate company auditors in order to assess whether they are complying with the requirements of the Sarbanes-Oxley Act?

A)The Public Company Accounting Oversight Board
B)The Securities Exchange Commission
C)The Federal Trade Commission
D)The Internal Revenue Service

Question 28

Ritz Co.wished to acquire Smart Inc.In conjunction with its plan of acquisition,Ritz hired Felix,a CPA,to audit the financial statements of Smart.Based on the audited financial statements and Felix's unqualified opinion,Ritz acquired Smart.Within six months,it was discovered that the inventory of Smart had been overstated by $500,000.Ritz commenced an action against Felix.Ritz believes that Felix failed to exercise the knowledge,skill,and judgment commonly possessed by CPAs in the locality,but is unable to prove that Felix either intentionally deceived it or showed a reckless disregard for the truth.Ritz is also unable to prove that Felix had any knowledge that the inventory was overstated.Which of the following would provide Ritz with a proper basis for prevailing in a lawsuit against Felix?

A)Negligence and breach of contract
B)Gross negligence and fraud
C)Negligence and fraud
D)Gross negligence and breach of contract

Question 29

In which of the following contexts is a professional most likely to experience a nonclient action?

A)An accountant who prepares and audits financial statements of companies.
B)A consultant who gives advice to companies for improving performance.
C)A securities broker who provides investment advice to retail investors.
D)An attorney who advises companies on corporation and business laws.

Question 30

If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA,which of the following,if present,would be the CPA's best defense?

A)The stockholder lacked privity to sue.
B)The false statements were immaterial.
C)The CPA did not financially benefit from the alleged fraud.
D)The client contributed to the negligence.

Question 31

In which of the following statements concerning a CPA firm's action is scienter or its equivalent absent?

A)Having actual knowledge of fraud.
B)Performing substandard auditing procedures.
C)Reckless disregard for accuracy in one's work.
D)Intent to profit by concealing fraud.

Question 32

In a state that has adopted the Ultramares rule and uses the primary benefit test,who amongst the following may hold an accountant liable for common law negligence?

A)Only the client.
B)Only the client and a third party that the accountant knew would rely on the accountant's work for a particular purpose.
C)Only a third party that the accountant knew would rely on the accountant's work for a particular purpose,and others who are in the same limited class as that third party.
D)Any third party that is a foreseeable user of the accountant's work may hold him/her liable if that third party suffers a loss as a direct result of the accountant's negligence.

Question 33

Under the Restatement (Second)of Torts,which of the following nonclients may sue an accountant for professional negligence?

A)A securities investor whose use of the financial statements prepared by the accountant to purchase common shares was foreseeable by the accountant.
B)A bank that was not known to the accountant and whose use of the financial statements was not foreseen,but whose use of the financial statements was foreseeable.
C)A bank that was known to the accountant but used the financial statements prepared by the accountant for a purpose that was not foreseen.
D)A creditor who was not known to the accountant but who used the financial statements for the same purpose as the bank whose use of the statements was known to the accountant.

Question 34

One of the elements necessary to hold a CPA liable to a client for conducting an audit negligently is that the CPA:

A)acted with scienter or guilty knowledge.
B)was a fiduciary of the client.
C)failed to exercise reasonable care.
D)executed a fraudulent engagement letter.

Question 35

If a client establishes fraud against a professional,he/she is more likely to receive:

A)compensatory and consequential damages.
B)punitive and consequential damages.
C)compensatory and punitive damages.
D)only consequential damages.

Question 36

Which of the following is sufficient to establish that a professional has acted with scienter for purposes of common law fraud?

A)The professional's careless consideration for the accuracy of his/her work.
B)The professional's reckless ignorance of facts.
C)The professional's failure to exercise due diligence.
D)The professional's negligent misstatement of fact.

Question 37

Brady,a CPA,is hired by Stanlee Inc. ,to audit its financial statements.Due to his negligence,Brady fails to discover that Tom,chairman of the board of directors of Stanlee,has embezzled $300,000 of the company funds.Brady finishes the audit and issues an unqualified opinion.Six months later,Brady reads in the newspapers that Tom has been caught for embezzling a total of $800,000 of company funds.Tom has resigned and the company funds have been fully recovered from him.Stanlee sues Brady.How much is Brady liable for?

A)$300,000
B)$1,100,000
C)$800,000
D)$500,000

Question 38

Mr.Orange is an accountant at a publicly traded corporation.To meet the standard of the skill of a professional account what should Mr.Orange have knowledge of?

A)Calculus and trigonometry
B)Generally accepted accounting principles (GAAP)
C)The Professional Rules of Responsibility for Attorneys
D)The advisory opinions this year of the Internal Revenue Service (IRS)

Question 39

A professional is not liable for breach of contract if the:

A)professional lacks the required educational qualifications.
B)client has opposed delegation of duties.
C)client obstructs the performance of the contract.
D)professional has not included such liability in the contract.

Question 40

In a state that uses the Restatement (Second)of Torts,who amongst the following may hold an accountant liable for common law negligence?

A)Only the client.
B)Only the client and a third party that the accountant knew would rely on the accountant's work for a particular purpose.
C)Only the client,a third party that the accountant knew would rely on the accountant's work for a particular purpose,and others who are in the same limited class as that third party.
D)Any third party that is a foreseeable user of the accountant's work may hold him/her liable if that third party suffers a loss as a direct result of the accountant's negligence.

Question 41

Hamish invested in the securities of the ABC Corporation (ABC).He lost a great deal of money on those securities after ABC's president admitted that financial statements about the profitability of ABC had been materially exaggerated.Andy Accountant had audited those statements and had issued an unqualified opinion that they complied with GAAS and GAAP.Hamish has sued Andy using Section 10(b)of the Securities Exchange Act of 1934 as the legal basis of his suit.To succeed,Hamish must prove that:

A)AA acted with scienter.
B)Hamish was in privity of contract with ABC or AA.
C)AA acted negligently.
D)AA's actions have a connection with intrastate commerce.

Question 42

Brown,a CPA,helped Cook organize a partnership that was actually an abusive tax shelter.Brown induced clients to participate by making false statements concerning the eligibility of deductions and tax credits.As a result of these activities,Cook derived $100,000 in gross income and Brown derived $50,000 in gross income.According to federal tax law,what is Brown's penalty for promoting this abusive tax shelter?

A)$100,000
B)$10,000
C)$1,000
D)$50,000

Question 43

Professional have a duty to perform their contractual duties to what standard for their clients?

A)To ensure all parties make a profit
B)To perform as an ordinary prudent person in the profession would perform
C)To ensure that all shareholders are happy with the work the professional has performed
D)To the standards of the International Labor Agreement (ILA)

Question 44

Brown & Co. ,a CPA firm,issued an unqualified opinion on the financial statement of its client,King Corp.Based on the strength of King's financial statements,Safe Bank loaned King $500,000.Brown was unaware that Safe would receive a copy of the financial statements or that they would be used in obtaining a loan by King.King defaulted on the loan.If Safe commences an action for common law fraud against Brown,then to be successful,Safe must prove that in addition to other elements it:

A)was in privity of contract with Brown.
B)was not contributorily negligent.
C)was in privity of contract with King.
D)justifiably relied on the financial statements.

Question 45

Under Section 11 of the Securities Act of 1933,an auditor who issues an opinion regarding financial statements of a company making a public distribution of securities can be held liable for errors in the expertised portions of the:

A)registration statement.
B)annual 10-K report.
C)8-K current report.
D)proxy statements.

Question 46

Nast Corp.orally engaged Baker & Co. ,CPAs,to audit its financial statements.The management of Nast informed Baker that it suspected the accounts receivable were materially overstated.Although the financial statements audited by Baker did,in fact,include a materially overstated accounts receivable balance,Baker issued an unqualified opinion.Nast relied on the financial statements in deciding to obtain a loan from Century Bank to expand its operations.Nast has defaulted on the loan and has incurred a substantial loss.If Nast sues Baker for negligence in failing to discover the overstatement,Baker's best defense would be that:

A)Baker did not perform the audit recklessly or with an intent to deceive.
B)Baker was not in privity of contract with Nast.
C)Baker performed the audit in accordance with generally accepted auditing standards.
D)Nast orally engaged Baker and Baker did not sign an engagement letter.

Question 47

For proving liability of a professional under ________,the plaintiff need not prove reliance on the wrongful conduct.

A)Section 17(A)of the Securities Act of 1933
B)Section 10(B)of the Securities Exchange Act of 1934
C)Section 18 of the Securities Exchange Act of 1934
D)Section 12(a)(2)of the Securities Act of 1933

Question 48

Individuals convicted of a Racketeer Influenced and Corrupt Organizations Act (RICO)violation may be:

A)fined up to $250,000 without an imprisonment.
B)fined up to $150,000 and imprisoned up to 25 years.
C)fined up to $150,000 without an imprisonment.
D)fined up to $250,000 and imprisoned up to 20 years.

Question 49

Who amongst the following is an "expert" under Section 11 of the Securities Act of 1933?

A)A consultant who is an independent director of a company making a public distribution of securities.
B)An auditor who issues an opinion regarding financial statements of a company making a public distribution of securities.
C)An accountant in the accounts division of a publicly traded company that is issuing new securities to the public.
D)An underwriter who is involved in issuance of new securities to the public by a publicly traded company.

Question 50

A(n)________ fraud applies when a professional misstates a material fact and recklessly or grossly negligently fails to ascertain the truth of the statement.

A)constructive
B)scienter
C)Ultramares
D)fabrication

Question 51

Who amongst the following can be held liable under Section 12(a)(2)of the Securities Act of 1933?

A)A consultant who is hired by a company making a public distribution of securities to improve performance
B)An auditor who issues an opinion regarding financial statements of a company making a public distribution of securities
C)An accountant in the accounts division of a publicly traded company that is issuing new securities to the public
D)An underwriter who is involved in issuance of new securities to the public by a publicly traded company

Question 52

For proving liability of a professional under ________,privity of contract between the plaintiff and the defendant is required.

A)Section 12(A)(2)of the Securities Act of 1933
B)Section 18 of the Securities Exchange Act of 1934
C)Section 17(a)of the Securities Act of 1933
D)Section 11 of the Securities Exchange Act of 1934

Question 53

Which of the following is correct concerning qualified opinions,disclaimers of opinions,and unaudited financial statements?

A)When an auditor issues a qualified opinion regarding audited financial statements,the auditor is relieved of responsibility for mistakes in financial statements only to the extent the qualification is specifically expressed in the opinion letter.
B)An auditor who,due to the limited scope of an audit,disclaims any opinion as to the ability of the financial statements to present the financial position of a company has no liability for misstatements or omissions in the financial statements.
C)Opinion letters stating that an auditor totally disclaims his/her liability for false and misleading financial statements excuse an accountant from the duty to exercise ordinary skill and care.
D)An auditor who prepares unaudited statements automatically creates a disclaimer as to the accuracy of those statements.

Question 54

West & Co. ,a large CPA firm,was engaged by Sand Corp.to audit its financial statements.West issued an unqualified opinion on Sand's financial statements.Reed is a securities investor who relied upon the statements when purchasing Sand stocks.After incurring major losses on Sand stocks,Reed accused Sand of making negligent misrepresentations in the financial statements.West was not aware of the misrepresentations nor was it negligent in performing the audit.If Reed sues West for damages,based on Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934,West will:

A)lose,because Reed relied upon the financial statements.
B)lose,because the statements contained negligent misrepresentation.
C)prevail,because some element of scienter must be proved.
D)prevail,because Reed was not in privity of contract with West.

Question 55

________ imposes liability on underwriters and experts for misstatements or omissions of material fact in Securities Act registration statements.

A)Section 18 of the Securities Exchange Act of 1934
B)Section 12(a)(2)of the Securities Exchange Act of 1934
C)Section 17(b)of the Securities Act of 1933
D)Section 11 of the Securities Act of 1933

Question 56

Under the Racketeer Influenced and Corrupt Organizations Act (RICO),a pattern of fraud is proved by the commission of:

A)two predicate offenses within a 10-year period.
B)five predicate offenses within a 20-year period.
C)two predicate offenses within a 20-year period.
D)five predicate offenses within a 10-year period.

Question 57

The maximum penalty for a criminal violation of the 1933 Act is a:

A)$20,000 fine and one year imprisonment.
B)$10,000 fine and five years' imprisonment.
C)$20,000 fine and five years' imprisonment.
D)$10,000 fine and one year imprisonment.

Question 58

Under Section 11 of the Securities Act of 1933,in order to establish the liability of an auditor who prepared a defective registration statement,a plaintiff must prove that:

A)he/she purchased securities issued pursuant to the defective registration statement.
B)the auditor was negligent in preparing the registration statement.
C)the auditor acted with scienter in preparing the registration statement.
D)he/she was in privity of contract with the auditor.

Question 59

Gold,a CPA,rendered an unqualified opinion on the 1987 financial statement of Eastern Power Co.Egan purchased Eastern bonds in a public offering subject to the Securities Act of 1933.The registration statement filed with the SEC included the financial statements.Gold is being sued by Egan under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements.To prevail,Egan must prove:

A)neither scienter nor reliance.
B)reliance but not scienter.
C)scienter but not reliance.
D)both scienter and reliance.

Question 60

An individual may be fined up to ________ and imprisoned for up to ________ for a criminal violation of the 1934 Act.

A)$15 million;10 years
B)$5 million;10 years
C)$15 million;20 years
D)$5 million;20 years

Question 61

Which of the following is correct concerning the professional-client privilege and working papers produced by an auditor while auditing the records of a client?

A)The client owns working papers.
B)Working papers may be transferred to another auditor without permission of the client.
C)The client does not have a right of access to the working papers.
D)The professional-client privilege usually belongs to the client.

Question 62

Mr.Green is a CPA who has been hired to perform an audit of a publicly traded corporation.As part of his duties,Mr.Green comes into possession of sensitive materials of the corporation.After the audit is over what should Mr.Green do with the materials?

A)Return all of them to the corporation
B)Keep them until asked for them
C)Turn the documents over to the Secretary of State's Office
D)Send the documents electronically to the SEC

Question 63

Which of the following means knowledge on the part of the person making the representation,at the time when they are made,that they are false?

A)Scienter
B)In pari delicto
C)Fraudulent misrepresentation
D)Intentional deceit

Question 64

Which of the following statements about the New York Stock Exchange's rules in regard to analysts' conflicts of interest is false?

A)The rules prohibit a securities firm from offering favorable research to a company in order to induce the company to use the securities firm's investment banking service.
B)The rules do not explicitly address whether an analyst's compensation may be tied to a specific investment banking services transaction.
C)The rules increase analyst independence by prohibiting investment banking personnel from supervising analysts or approving research reports.
D)The rules are substantially similar to the SEC's Regulation AC.

Question 65

Incorporated professionals can escape liability for their associate's torts unless:

A)the professional actually supervised the wrongdoing associate or participated in the tort.
B)the professional was actually aware of the associate's tort and did nothing about it.
C)the professional should have been aware of the associate's tort.
D)the tort also constitutes a criminal act.

Question 66

Which of the following specifically authorizes the SEC to issue point-of-sale disclosure rules when investors purchase investment products or services?

A)Dodd-Frank Act
B)Securities Act of 1933
C)Sarbanes-Oxley Act
D)Securities Exchange Act of 1934

Question 67

Which of the following statements about the Public Company Accounting Oversight Board (PCAOB)is false?

A)The PCAOB is a federal agency with broad regulatory power like the Financial Industry Regulatory Authority (FINRA).
B)The PCAOB was created to oversee the audits of public companies.
C)Public accounting firms that audit financial statements of public companies are required to register with PCAOB and submit to its rules.
D)he PCAOB has the power to inspect periodically public accounting firms and to issue reports of the results of the reviews.

Question 68

Some courts allow a professional to use the defense of ________,which stands for the idea that damages are proportioned between the parties to a negligence action in proportion to their relative fault.

A)contributory negligence
B)assumption of risk
C)lack of intent
D)comparative negligence

Question 69

Under which of the following will courts refuse to intervene in a dispute between litigants when both have engaged in wrongdoing?

A)Good-faith exception
B)Respondeat superior
C)Ratio decideni
D)In pari delicto

Question 70

A person who is injured in his/her business or property by reason of a professional's conduct or participation,directly or indirectly,in an enterprise's affairs through a pattern of racketeering activity may recover ________ from the professional.

A)only part of the damage for which the professional is responsible
B)five times his/her actual damages
C)three times his/her actual damages
D)only his/her actual damages

Question 71

The SEC has adopted ________,which requires an analyst's research report to include the analyst's certification that views expressed in the report accurately reflect his/her personal views.

A)Regulation B
B)Regulation C
C)Regulation AC
D)Regulation A

Question 72

The Dodd-Frank Act adds new ________ to the 1934 Act,making it unlawful for any broker,dealer,or other person selling or offering to sell or purchasing or offering to purchase any security (other than a government security),to make for the purpose of inducing the purchase or sale of such security any false or misleading misstatement of material fact,if the person knew or had reasonable ground to believe the statement was false or misleading.

A)Section 10(b)
B)Section 17(a)
C)Section 9(a)(4)
D)Section 18

Question 73

Which of the following expresses whether the audit has been performed in compliance with GAAS and whether,in the auditor's opinion,the financial statements fairly present the client's financial position and results of operations in conformity with GAAP?

A)Opinion letter
B)Advisory opinion
C)No-action letter
D)Compliance letter

Question 74

Which of the following statements about limited liability partnerships is true?

A)The LLP has become the preferred form of business for professionals who do not incorporate.
B)A partner's liability for his partner's professional malpractice automatically extends to his personal assets.
C)A partner retains partial liability for his own malpractice.
D)LLPs were created as a reaction to the personal liability imposed on physicians for the medical malpractice of their partners.

Question 75

The Private Securities Litigation Reform Act of 1995 requires an auditor to:

A)report to the Securities and Exchange Commission a client's illegal act that has a material impact on the financial statements of the client when the client has failed to take remedial action.
B)resign from an audit engagement when the client commits an illegal act that has a material impact on the financial statements of the client and the client has failed to take remedial action.
C)inform a client's shareholders of the client's illegal act that has a material impact on the financial statements of the client when the client has failed to take remedial action.
D)force a client to disclose to its shareholders and report to the Securities and Exchange Commission a client's illegal act that has a material impact on the financial statements of the client when the client has failed to take remedial action.

Question 76

Jerry,an accountant,works for H & J Accounting,a limited liability partnership.Jerry injuries his client by failing to act as the ordinarily prudent accountant would act.Generally speaking,is Jerry liable to the client for professional misconduct?

A)No,because Jerry is shielded by the limited liability status of the partnership.
B)No,because Jerry never provided the client with any assurances.
C)Yes,because Jerry failed to have the client sign a contract releasing him of liability.
D)Yes,because Jerry is not shielded by the limited liability status of the partnership.

Question 77

Which of the following is means there is a direct contractual relation between the parties?

A)Privity
B)Ripeness
C)In pari delicto
D)Scienter

Question 78

According to the Sarbanes-Oxley Act,how long must audit and review working papers be retained?

A)2 years
B)7 years
C)10 years
D)20 years

Question 79

Due to violations of securities,tax,and other laws,a professional might be subject to an administrative proceeding that may result in:

A)an injunction.
B)revocation or suspension of a professional license.
C)imprisonment.
D)a cease and desist order.

Question 80

Which of the following created an independent board that oversees the audits of public companies?

A)Sarbanes-Oxley Act
B)Dodd-Frank Act
C)Securities Act of 1933
D)Securities Exchange Act of 1934