Question 1

The Securities Act of 1933

Accepted Answer

The Securities Act of 1933 is also known as the Truth in Securities Act. It requires companies to register with the Securities and Exchange Commission (SEC) before offering their securities to the public. The act also mandates that companies provide complete and accurate information to potential investors about the securities being offered. The Securities Act of 1933 is designed to prevent fraud in the sale of securities and to protect investors from fraudulent securities offers.

Question 2

In the U.S., if the auditor can demonstrate having performed services with the same degree of skill and judgment possessed by others in the profession, it can be said to have exercised:

Accepted Answer

Due care is the level of performance that a reasonably prudent auditor would have exercised in the same circumstances. It is the auditor's responsibility to demonstrate that they have performed their services with the same degree of skill and judgment possessed by others in the profession.

Question 3

The Restatement (Second) of Torts Approach

Accepted Answer

The Restatement (Second) of Torts approach expands an accountant's legal liability to third parties who are identified by the client as intended recipients of the accountant's work. This approach recognizes that accountants can be held liable to a broader group than just those with whom they have a direct contractual relationship (privity).

Question 4

The Credit Alliance v.Arthur Andersen & Co.case established three tests that must be satisfied for holding auditors liable for negligence to third parties.All of the following are tests described EXCEPT

Accepted Answer

The Credit Alliance v. Arthur Andersen & Co. case established three tests for holding auditors liable for negligence to third parties: (1) knowledge by the accountant that the financial statements are to be used for a particular purpose, (2) the intention of the third party to rely on those statements, and (3) some action by the accountant linking him or her to the third party that provides evidence of the accountant's understanding of intended reliance. The identity of the third party does not necessarily have to be directly known to the auditor. Therefore, the missing test described is D, which is not necessary for imposing liability on auditors for negligence.

Question 5

Under the Securities Act of 1933, if damages were incurred and there was a material misstatement or omission in the financial statements, the CPA automatically loses unless

Accepted Answer

The CPA can defend themselves by proving they conducted a reasonable investigation and had reasonable grounds to believe the financial statements were accurate, thus rebutting the allegations.

Question 6

Under the Securities Act of 1933 and the Securities and Exchange Act of 1934, accountants may be subject to criminal penalties for:

Accepted Answer

The answer of Under the Securities Act of 1933 and...

Question 7

The most relevant sources of civil liabilities for auditors failing to adhere to the requirements of the laws in carrying out professional obligations include all of the following except for:

Accepted Answer

The answer of The most relevant sources of civil liabilities...

Question 8

A privity relationship means that

Accepted Answer

A privity relationship means there is a contractual obligation between two parties. Option A is incorrect because being a user of financial statements does not necessarily establish a privity relationship. Option B may be true, but it is not a defining characteristic of a privity relationship. Option C is incorrect because privity does not necessarily limit financial liability.

Question 9

An audit engagement letter

Accepted Answer

An audit engagement letter formalizes the relationship between the auditor and the client for a specific engagement. It outlines the scope of the audit and the responsibilities of both the auditor and the client. While an audit engagement letter is recommended by GAAS, it is not always required. It also does not detail the SEC's expectations for the audit firm for a specific engagement, as those expectations would be outlined in SEC rules or regulations.

Question 10

The legal term for the intent to deceive, manipulate or defraud is

Accepted Answer

The legal term for the intent to deceive, manipulate or defraud is scienter. Nonfeasance refers to a failure to act when there is a duty to act, misfeasance refers to a wrongful act, and constructive fraud refers to a situation where there is no actual intent to deceive but the actions taken have the effect of deceiving or defrauding.

Question 11

The executives of McKesson and Robbins Pharmaceuticals were able to steal around $2.9 million in 1939 because

Accepted Answer

The auditors failed to perform a physical inspection of inventory, which allowed the executives to falsify records and steal funds.

Question 12

Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor?

Accepted Answer

Adherence to generally accepted auditing standards (GAAS) is considered sufficient to demonstrate due care, as these standards provide a framework for conducting audits with competence and diligence.

Question 13

What is the first general stage in an audit-related dispute as identified by USC Professor Zoe-Vonna Palmrose?

Accepted Answer

The first general stage in an audit-related dispute is the occurrence of events that result in losses for users of the financial statements. This stage sets the foundation for any potential legal action or investigation.

Question 14

All of the following proof can be used in an auditor's defense against third party lawsuits for fraud except for:

Accepted Answer

The answer of All of the following proof can be...

Question 15

When an auditor acts so carelessly in the application of professional standards that it implies a reckless disregard for the standards of due care is referred to as

Accepted Answer

Constructive fraud refers to a situation where an auditor's actions are so careless that they imply a reckless disregard for the standards of due care, even if there was no intent to deceive.

Question 16

The Securities and Exchange Act of 1934

Accepted Answer

The Securities and Exchange Act of 1934 requires publicly-traded companies to file audited annual statements and reviewed quarterly statements with the Securities and Exchange Commission (SEC). It also requires companies to disclose material information on an ongoing basis and prohibits insider trading. While the act does touch upon independence of auditors and the regulation of financial statements, these are not the primary focuses of the act. Therefore, choices A, C, and D are not the best choices for this question.

Question 17

The Rosenblum case ruling was of concern to the accounting profession because it implied that

Accepted Answer

The Rosenblum case ruling implied that all possible third party users of financial statements must be anticipated, which was of concern to the accounting profession as it could increase the scope of potential liability for auditors and accountants.

Question 18

The Ultramares v.Touche case of 1933 held that a cause of action based on negligence could not be maintained by a third party who was not in contractual privity; however, it did leave open the possibility that:

Accepted Answer

The Ultramares v. Touche case of 1933 held that a cause of action based on negligence could not be maintained by a third party who was not in contractual privity. However, it left open the possibility that third parties may sue in the case of fraud or constructive fraud.

Question 19

When courts find accountants liable for constructive fraud, the implication is that

Accepted Answer

The implication of finding accountants liable for constructive fraud is that they may be held liable for fraud even if they had no knowledge of deceit. This is because constructive fraud is based on a breach of duty, rather than intentional deception. The other answer choices are not necessarily true based on the fact that accountants have been found liable in this specific scenario.

Question 20

The legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future is referred to as:

Accepted Answer

Common law refers to the legal precedent that evolves from legal opinions issued by judges in deciding a case and guides judges in deciding similar cases in the future. It is based on past decisions and is constantly evolving.

Quiz 6: Legal and Regulatory Obligations in an Ethical Framework