Question 1

Lebron,an attorney,allows a statute of limitations to lapse on a claim by Midwest Metal Fabrication Company,a client.Lebron

Accepted Answer

Lebron can be held liable for malpractice for allowing the statute of limitations to lapse on a client's claim. It is a breach of duty to the client and can result in damages or disciplinary action against the attorney.

Question 2

Toby is an accountant whose clients include U-All Company.If Toby is negligent in his work for U-All,most courts would hold him liable to U-All and

Accepted Answer

Most courts follow the "foreseen user" rule, which holds accountants liable to third parties who are specifically intended to rely on the accountant's work, such as foreseen users.

Question 3

Estes,an accountant,contracts to perform services for Frasier.In performing those services,Estes uncovers a suspicious financial transaction.Estes is most likely not liable if he

Accepted Answer

As an accountant, Estes has a duty of care to report any suspicious financial transaction. By investigating and reporting the discovery to Frasier, Estes is fulfilling his duty and acting ethically. Failing to discover the transaction sooner (choice A) would be negligent, concealing the discovery (choice B) would be unethical, and obtaining restitution without informing Frasier (choice D) could be seen as a breach of trust.

Question 4

Doug is an accountant whose clients include Everyday Products,Inc.(EPI).Under the Ultramares rule,if Doug is negligent in his work for EPI,he would be liable to

Accepted Answer

The Ultramares rule limits an accountant's liability for negligence to their client only, not to third parties.

Question 5

Grover Nut Company files a suit against Hud,its former account-ant,alleging actual fraud.Grover must prove

Accepted Answer

To prove actual fraud, Grover Nut Company must prove that Hud had intent to deceive, meaning he knowingly made a false statement with the intention of causing harm to the company. Misrepresentation of a non-material fact or unjustifiable reliance would not be enough to prove actual fraud.

Question 6

Gert,an accountant,contracts to conduct an audit for Hailey.In performing the audit,Gert fails to detect certain misconduct.Gert is most likely

Accepted Answer

As an accountant conducting an audit, Gert has a standard duty to exercise reasonable care and skill to detect material misstatements or fraud. If a normal audit would have revealed the misconduct and Gert fails to detect it, he would be liable for the failure to exercise due care. However, if Gert issues a specifically qualified opinion or generally disclaims any liability, it may limit his liability. If the misconduct was due to Hailey's negligence, Gert may not be liable for it.

Question 7

Craig is an accountant whose clients include Digby Excavation Corporation.Elbert is Craig's attorney.Under the common law and by statute in many states,working papers that Craig develops when preparing financial reports for Digby are owned by

Accepted Answer

Under the common law, working papers developed by an accountant belong to the accountant who created them. Thus, Craig, as the accountant who prepared the financial reports, owns the working papers.

Question 8

Quibble Game Company's liabilities exceed its assets.Quibble hires Roo & Slay,an accounting firm,to prepare a balance sheet.Through Roo & Slay's negligent omissions,the sheet shows a positive net worth.Town Bank relies on the balance sheet to make a loan to Quibble.When Quibble defaults,Town files a suit against Roo & Slay.Under the Restatement rule,Roo & Slay is most likely

Accepted Answer

Under the Restatement rule, an accountant can be liable to third parties if they knew that the third party would rely on the financial statements.

Question 9

Mona,an accountant,prepares for NuTech Corporation a financial statement that omits a material fact.The financial statement is included in NuTech's registration statement,which Pam reads.Pam buys NuTech stock.Under Section 11 of the Securities Act of 1933,for Mona to be liable for the omission,Pam must show that

Accepted Answer

The answer of Mona,an accountant,prepares for NuTech Corporation a financial...

Question 10

Hadley,an accountant,accumulates working papers while performing an audit for Ilene.After the audit,these documents belong to

Accepted Answer

As an accountant, Hadley has a professional responsibility to maintain the confidentiality of the working papers. However, the papers are ultimately the property of the client, Ilene. Therefore, after the audit is completed, the papers belong to Ilene, but Hadley still has the right of access to them as a professional courtesy.

Question 11

Pluto accuses Quark,an accountant,of committing defalcation.This is

Accepted Answer

Defalcation is another word for embezzlement, which involves the fraudulent appropriation of funds by a person in a position of trust or responsibility.

Question 12

Ezra,an accountant,intentionally misstates a material fact to mislead Fruit Packing Industries,Inc.,a client.Fruit Packing justifiably relies on the misstatement to its detriment.Ezra is most likely liable for

Accepted Answer

Ezra is liable for actual fraud because he intentionally misrepresented a material fact, leading the client to rely on it to their detriment.

Question 13

Marquis Company's liabilities exceed its assets,but the firm's employees falsify its books to reflect a positive net worth.Marquis hires Nan & Ollie,an accounting firm,to prepare a balance sheet,which is certified to show a positive net worth.Pure Credit Corporation relies on the balance sheet to make a loan to Marquis.When the firm defaults,Pure Credit files a suit against Nan & Ollie.Under the Ultramares rule,the accounting firm is most likely

Accepted Answer

Under the Ultramares rule, an accounting firm is only liable to third parties with whom the firm has privity of contract or a relationship so close as to approach that of privity. Nan & Ollie did not have a direct relationship with Pure Credit since they were hired by Marquis, and thus they are not liable under the Ultramares rule.

Question 14

Yves is an accountant charged with negli-gence by Zesty Soup Company,a client.Yves may successfully defend against the claim if he can show that

Accepted Answer

In order for Yves to successfully defend against the negligence claim, he must prove that his negligence was not the proximate cause of the client's losses. This means that there may have been other factors that contributed to the client's losses, and Yves' negligence was not the primary cause. The other options (A, B, and D) do not necessarily prove that Yves was not negligent or were not the cause of the client's losses.

Question 15

Bruno is an accountant.Under the Sarbanes-Oxley Act,the degree of government oversight over the public accounting practices of Bruno and other accountants was

Accepted Answer

The Sarbanes-Oxley Act increased the degree of government oversight over the public accounting practices of accountants like Bruno in order to prevent fraudulent activities in financial reporting.

Question 16

Quin,an accountant,prepares for Reddy,Inc.,a financial state-ment that omits a material fact.The statement is included in Reddy's registration statement with the Securities and Exchange Commission.Timor,who reads the statement,and Ubi,who does not,each buy Reddy stock.Velma reads the statement but does not buy the stock.Under Section 11 of the Securities Act of 1933,Quin may be liable to

Accepted Answer

Section 11 of the Securities Act of 1933 imposes liability on those who prepare or certify false or misleading statements included in a registration statement filed with the SEC. In this case, Quin, the accountant, prepared a statement that omitted a material fact, and that statement was included in Reddy's registration statement. Therefore, Quin may be liable to those who bought Reddy stock and were harmed as a result of the false statement. Timor and Ubi bought the stock and could be harmed, while Velma did not buy the stock, so she would not be able to recover damages. Therefore, the correct answer is B - Timor and Ubi.

Question 17

Filtration Products,Inc.,files a suit against Emmett,its former accountant,al-leging constructive fraud.Emmett may be held liable

Accepted Answer

Constructive fraud can be established if the defendant was grossly negligent in the performance of his duties. It is not necessary to prove actual fraud or fraudulent intent. However, if the defendant merely made a mistake or error in judgment, he/she would not be held liable for constructive fraud.

Question 18

Dwayne can be described as "a reasonably competent general practitioner of ordinary skill,experience,and capacity." This is the normal standard for judging the performance of

Accepted Answer

The standard described is commonly used in the legal profession for evaluating an attorney's performance.

Question 19

Lulu,an accountant,conducts an audit of Microstuff Toys,Inc.After the conclu-sion of the audit,the working papers created in preparing the audit must be

Accepted Answer

According to generally accepted auditing standards, working papers should be maintained for seven years in case they are needed for reference or a subsequent audit. This is to provide documentation and support for the auditor's opinion and findings. Option A is not appropriate as working papers are important records, and disposal needs to be approved and documented properly. Option B is not entirely correct as the review by the Public Company Accounting Oversight Board is not the only reason for maintaining the working papers. Option D is also not applicable here as there is no requirement to retain the working papers forever.

Question 20

Lars accuses Moe,an attorney,of committing malpractice.Malpractice is

Accepted Answer

Malpractice refers to professional negligence, which means that an attorney failed to exercise the degree of care and skill that another attorney in the same field would use under similar circumstances, resulting in harm to their client. Malpractice is not a breach of ethics, defalcation, or a mistake in judgment, although it may involve those factors.

Quiz 30: Liability of Accountants and Other Professionals