Question 1

Most of the major lawsuits against public accounting firms have dealt with

Accepted Answer

Most of the major lawsuits against public accounting firms have dealt with audited or unaudited financial statements. These lawsuits typically arise when investors or other stakeholders rely on inaccurate or incomplete financial statements in making business decisions.

Question 2

An example of a breach of contract would be

Accepted Answer

A breach of contract occurs when one party fails to fulfill their obligations as agreed. In option C, the accounting firm failed to deliver the tax return on the agreed date due to prioritizing other work, which constitutes a breach of contract.

Question 3

When an auditor issues an erroneous opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards,it results in

Accepted Answer

An erroneous opinion resulting from a failure to comply with auditing standards is known as an audit failure. This occurs when the auditor does not gather sufficient evidence to support their opinion or misinterprets the evidence that they do gather, leading to an incorrect or inappropriate opinion being issued. Business failure, audit risk, and business risk are all related concepts but do not accurately reflect the specific scenario described in the question.

Question 4

PAs are members of a professional association that can impose sanctions for violations of the professional code of conduct.What is an example of a severe penalty that can be imposed by a professional association?

Accepted Answer

Expulsion from the professional association is the most severe penalty that can be imposed by a professional association. It means that the individual is no longer a member of the association and cannot practice as a PA.

Question 5

A legal duty that arises when there is a contractual agreement with the client is known as

Accepted Answer

Privity refers to the relationship that exists between two parties in a contract, implying that legal duties and obligations are directly tied to the contractual agreement between those parties. In the context of professional services, such as legal or financial advice, privity means that the professional owes a duty of care specifically to the client they have a contract with, rather than to third parties.

Question 6

According to the CPA Canada Handbook,the auditor's responsibility for failure to detect fraud arises

Accepted Answer

The auditor's responsibility for failure to detect fraud arises when such failure clearly results from failure to comply with generally accepted auditing standards. In other words, the auditor is responsible for detecting fraud during the audit process to the extent required by professional standards, and failure to do so can result in liability for the auditor. This responsibility exists regardless of the size of the misstatement or whether the examination was specifically designed to detect fraud. The auditor must exercise professional skepticism and maintain an attitude of suspicion throughout the audit process to detect the possibility of fraud.

Question 7

In connection with the examination of financial statements,an auditor could be responsible for failure to detect a material fraud if

Accepted Answer

An auditor could be responsible for failing to detect a material fraud if the audit work was planned in a hasty and ineffective manner, as this could lead to inadequate procedures and oversight, increasing the risk of missing significant fraud.

Question 8

An example of an audit failure is when the

Accepted Answer

An audit failure occurs when an auditor does not comply with auditing standards, leading to an incorrect audit opinion. This is distinct from situations like bankruptcy after an unqualified opinion, which may not necessarily indicate an audit failure.

Question 9

One reason for lawsuits against public accountants is

Accepted Answer

The increasing complexity of auditing and accounting functions is a major reason for lawsuits against public accountants. As businesses, financial transactions, and regulations become more complex, it is harder for accountants to detect or prevent fraud, errors, and other financial irregularities. As a result, stakeholders may suffer financial losses and sue accountants for providing inaccurate or misleading information or failing to identify significant risks or deficiencies. This requires public accountants to maintain high professional standards, apply rigorous methodologies, and leverage technological tools to enhance their skills, knowledge, and quality of services.

Question 10

Amin is distraught.Six months ago,a big-box stereo store opened just down the street from his independent stereo and music business and now he is unable to continue operating his business.Only eight months ago,you issued an unqualified audit opinion on his financial statements that showed the financial results of a well-run,profitable store.Amin's business is experiencing

Accepted Answer

Amin's business is experiencing failure due to the competition from the big-box stereo store. This is not related to a customer expectation gap or an audit failure, and while fiduciary duty may be relevant in some contexts, it is not applicable to this situation.

Question 11

Conflict between financial statement users and auditors often arises because of the

Accepted Answer

The expectation gap refers to the difference between what the users of financial statements expect from an audit and what auditors are able to deliver. Users may expect auditors to provide absolute assurance that financial statements are completely free from error, fraud, or misrepresentation, which is not possible given the nature of auditing. This gap often leads to conflicts between financial statement users and auditors.

Question 12

The failure to perform a duty with the requisite standard of care is known as

Accepted Answer

Negligence is the failure to exercise the degree of care that a reasonable person would have exhibited in the same situation. It is the most common type of breach of duty in professional negligence cases, including those involving CPAs. The other choices are not directly related to the definition of breach of duty.

Question 13

While performing services for their clients,professionals have always had a duty to provide a level of care that is

Accepted Answer

Professionals are required to provide a reasonable level of care while rendering their services. This means that they should exercise the same level of skill, expertise, and care that is expected of someone in their profession. It does not mean that they have to provide a superior or error-free service, but rather reasonable care under the circumstances.

Question 14

To succeed in an action against the auditor,the client must be able to show that

Accepted Answer

In order to succeed in an action against the auditor, the client must show a close causal connection between the auditor's breach of the standard of due care and the damages suffered by the client. Gross negligence or fraud may be sufficient to prove a breach of the standard of due care, but they alone are not sufficient to succeed in the action. A written contract may specify the scope of the auditor's duties and responsibilities, but it is not necessary to have a contract to establish liability for professional negligence.

Question 15

In the auditing environment,failure to meet generally accepted auditing standards is often

Accepted Answer

Failure to meet generally accepted auditing standards is considered strong evidence of negligence because auditors are expected to adhere to these standards to ensure the accuracy and reliability of their audits.

Question 16

In rare cases,auditors have been held liable for criminal acts.A criminal conviction against an auditor can result only when it is demonstrated that the auditor

Accepted Answer

Criminal liability can only be imposed if the auditor knowingly issued an incorrect auditor's report. Negligence or gross negligence may result in civil liability, but not criminal liability unless there is intent to deceive. Financial loss to a third party may also result in civil liability, but not necessarily criminal liability.

Question 17

The principal issue to be resolved in cases involving alleged negligence is usually

Accepted Answer

The principal issue to be resolved in cases involving alleged negligence is usually the level of care required of the defendant. This means determining whether the defendant's actions fell below the standard of care that a reasonable person would have exercised in similar circumstances. The amount of damages suffered by the plaintiff may be relevant in determining the extent of the defendant's liability, but it is not the primary issue. The imposition of punitive damages on the defendant is not always appropriate in cases of negligence and is a separate issue. Fraud is also a separate issue that would not necessarily be relevant in a negligence case.

Question 18

The King Surety Company wrote a general fidelity bond covering defalcations by the employees of Wilson,Inc.Thereafter,Cooney,an employee of Wilson,embezzled $17 200 of company funds.When the activities were discovered,King paid Wilson the full amount in accordance with the terms of the fidelity bond,and then sought recovery against Wilson's auditors,Lynch & Merritt,public accountants.Which of the following would be Lynch & Merritt's best defence?

Accepted Answer

Lynch & Merritt's best defense would be that the embezzlement was a result of clever forgeries and collusive fraud that could not have been detected by an examination made in accordance with generally accepted auditing standards. This defense would argue that Lynch & Merritt fulfilled their duty of care and professional standards, and that the fault lies with the criminal actions of the employee.

Question 19

It is not practical for users to evaluate the quality of the performance of most professional services because of their

Accepted Answer

Professional services often involve skills and knowledge that are complex and specialized, making it difficult for most users to evaluate the quality of the performance.

Question 20

PA was engaged by Microcomputer Distributor Limited (MDL)to conduct a review engagement.The financial statements are used primarily by the shareholders,management,and by the bank.Recently,an employee was fired for stealing computer parts,primarily chips and boards that could easily be placed in a pocket.MDL is suing PA because they believed that audit procedures,such as counting inventory,would have detected this fraud.What is PA's best defence?

Accepted Answer

The answer of PA was engaged by Microcomputer Distributor Limited...

Quiz 3: Professional Ethics and Legal Liability