Question 1

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.
-Andrew may be entitled to complete compensation minus the amount of damages caused by the breach if he ________ performed on the contract.

Accepted Answer

Substantial performance of a contract, where the essential duties have been performed with only minor variances, typically entitles the performing party to compensation, minus any damages caused by the deviations from the contract terms.

Question 2

Which statement accurately describes the requirements regarding working papers under the Sarbanes-Oxley Act of 2002?

Accepted Answer

The answer of Which statement accurately describes the requirements regarding...

Question 3

Opal has performed an audit and has various documents that she used to complete the audit including notes, copies, calculations, and memorandums. These documents would be known as:

Accepted Answer

Working papers are the documents that auditors use to record their audit work and findings, including notes, calculations, and memorandums.

Question 4

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.
-The contract that Andrew and Dominique entered into setting the scope of Andrew's duties is referred to as a[n] ________.

Accepted Answer

An engagement letter is a document that outlines the scope of duties and the agreement between a professional (such as an accountant or auditor) and their client, which is the case with Andrew and Dominique.

Question 5

What must a plaintiff do in order to recover damages under the Securities Act of 1933 after purchasing a security covered by a registration statement containing false information or missing information?

Accepted Answer

Under the Securities Act of 1933, a plaintiff seeking to recover damages for a security purchased under a registration statement containing false or missing information does not need to prove reliance on the financial statement or establish privity with the accountant or any other party involved in the preparation of the registration statement. This provision is designed to protect investors by making it easier to recover losses caused by misleading or incomplete information.

Question 6

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina.
-Under the Restatement test, referenced in the text's discussion of the case Bily v. Arthur Young & Co., which of the following is true regarding the action brought by Bank ABC against Amina based upon the loss of funds on Jonathan's loan?

Accepted Answer

Under the Restatement test, as referenced in the Bily v. Arthur Young & Co. case, a third party can recover losses if the accountant was aware that the financial statements would be used for a specific transaction, even if the accountant did not know the exact identity of the third party. In this scenario, Amina knew her work was for the purpose of obtaining a loan, which aligns with the conditions under which a third party, such as Bank ABC, could recover losses.

Question 7

The Public Company Accounting oversight board was created by the Sarbanes-Oxley Act to do what?

Accepted Answer

The Public Company Accounting Oversight Board (PCAOB) was established by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. This involves greater government oversight of public accounting firms.

Question 8

Which of the following is false regarding the Private Securities Litigation Reform Act?

Accepted Answer

The Private Securities Litigation Reform Act does include provisions for notifying the SEC under certain circumstances, contrary to the statement in option B.

Question 9

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege.
-The notes, calculations, memorandums, and similar documents that Norah developed in her review of Joel's financial statements are called which of the following?

Accepted Answer

The notes, calculations, memorandums, and other documents created by an accountant during the course of an audit or review of a client's financial statements are commonly referred to as "working papers." These documents are used to support the accountant's findings and conclusions.

Question 10

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina.
-Under the Restatement test, referenced in the text's discussion of the case Bily v. Arthur Young & Co., which of the following is true regarding whether Bank XYZ can recover against Amina based upon the loan to Yuri?

Accepted Answer

The answer of [Travel Plans] Amina, a certified public accountant,...

Question 11

Besides attorneys, who else may be held liable in a malpractice action?

Accepted Answer

Malpractice actions can extend beyond attorneys to include professionals like doctors, real estate brokers, and accountants, as they all can be held to a standard of professional care and expertise.

Question 12

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.
-If Andrew engaged in ________ breach, he is not entitled to compensation for work completed.

Accepted Answer

A material breach is a significant failure to perform under the contract, which allows the other party to be excused from their obligations and not pay for the work completed.

Question 13

In negligence cases involving the accountant's work, which of the following is true regarding the use of working papers?

Accepted Answer

Working papers can be used as evidence in negligence cases to either support or refute claims of negligence. They are an essential part of the accountant's documentation and can provide insight into the accountant's work and decision-making process.

Question 14

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina.
-Under the Restatement test, referenced in the text's discussion of the case Bily v. Arthur Young & Co., which of the following is true regarding the effort by Bank XYZ to recover against Amina based upon Maggie's default?

Accepted Answer

Amina and Maggie had an agreement that the financial statements would only be used for obtaining a loan from Maggie's uncle, not from any banks or other lenders. This specific agreement limits the intended use of the audit, making it difficult for Bank XYZ to claim reliance on Amina's work for their loan to Maggie.

Question 15

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business. She had a contract with Joel to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Joel's business, she developed various notes, calculations, memorandums, and other papers. Gloria, Joel's fiancé, approached Norah to inquire about Joel's business. Gloria and Norah had been friends for many years. Norah allowed Gloria to look at the various notes, calculations, and other papers resulting from her review of Joel's financial statements and other records. Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Norah agreed and proceeded to discuss Joel's finances with Gloria, revealing all the information that Joel had disclosed to her. Gloria broke up with Joel, telling him that after what she discovered from Norah, she was concerned about Joel's finances. Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege.
-What is Norah's contract with Joel to do audit work for him called?

Accepted Answer

An engagement letter is a written agreement that describes the business relationship to be entered into by a client and a company, including the scope of the work to be performed and the terms of the engagement. This applies to Norah's contract with Joel to audit his books for his own use.

Question 16

Under the Sarbanes-Oxley Act of 2002, how long are accountants required to keep working papers?

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires accountants to keep all audit or review workpapers for a period of 5 years from the end of the fiscal period in which the audit or review was concluded.

Question 17

[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal.
-Which of the following would be available to Dominique, assuming that she can establish that Andrew failed to meet his contractual obligations?

Accepted Answer

Dominique would be entitled to the cost of obtaining a different accountant to perform the breached contractual duties and any reasonable and foreseeable damages related to the breach. This is because when a party fails to meet their contractual obligations, the non-breaching party is typically entitled to damages that put them in the position they would have been in had the contract been performed as agreed.

Question 18

Teliva has been hired as an accountant to audit a major firm. Teliva is required as an accountant to use adequate procedures so that they can detect illegal acts committed by an audited company under which of the following acts?

Accepted Answer

The Private Securities Litigation Reform Act requires accountants to use adequate procedures to detect illegal acts committed by an audited company. This act is specifically designed to address issues related to securities fraud and imposes certain standards on auditors to enhance the detection of fraudulent activities.

Question 19

An accountant's failure to fulfill obligations under GAAP and GAAS is considered prima facie evidence of what?

Accepted Answer

The answer of An accountant's failure to fulfill obligations under...

Question 20

For which of the following does the Securities Exchange Act impose liability?

Accepted Answer

E  The Securities Exchange Act imposes liability for fraudulent statements made to the SEC and for fraud in performing an audit, as these actions directly affect the integrity of financial markets and investor protection.

Quiz 11: Liability of Accountants and Other Professionals