Question 1

If Paul ______________ performed on the contract,he may be entitled to complete compensation minus the amount of damages caused by the breach.

Accepted Answer

If the contract is substantially performed and the breach is therefore immaterial, the accountant may be entitled to the full amount of the contractually agreed-on fee minus the amount of damages caused by the breach.

Question 2

If Paul engaged in ____________ breach,he is not entitled to compensation for work completed.

Accepted Answer

An accountant who engages in a material breach of contract is not entitled to compensation for work completed.

Question 3

Which of the following requires accountants to use adequate procedures so that they can detect illegal acts committed by an audited company?

Accepted Answer

The Private Securities Litigation Reform Act (PSLRA) placed new statutory obligations on accountants by requiring that they use adequate procedures when performing an audit so that they can detect any illegal acts committed by the audited company.

Question 4

Assuming that Teresa can establish that Paul failed to meet his contractual obligations,which of the following would be available to her?

Accepted Answer

When an accountant breaches a contract, the client is entitled to recovery for damages that include the cost of obtaining a different accountant and any reasonable and foreseeable damages related to the breach.

Question 5

Which of the following is true regarding what a plaintiff must 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

To recover damages, a plaintiff-someone who purchased a security covered by a flawed registration statement-does not need to prove reliance on the statement or to establish privity. The purchaser may recover damages without knowing about or relying on the flawed information or even being a party to the contractual agreement.

Question 6

Under the Restatement Test,as discussed in the case in the text,Bily v.Arthur Young & Co.,which of the following is true regarding whether XYZ Bank can recover against Selena based upon the loan to Bob?

Accepted Answer

Under the Restatement Test, there is no liability when the client's transaction (as represented to the auditor) changes so as to increase materially the audit risk.

Question 7

What are the various documents including,notes,calculations,and memorandums that Rhonda developed in her review of Greg's financial statements called?

Accepted Answer

Working papers are the various documents used and developed during an audit, including notes, calculations, copies, memorandums, and other papers constituting the accountant's work product.

Question 8

Which of the following was created by the Sarbanes-Oxley Act to obtain greater government oversight of public accounting firms?

Accepted Answer

The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board establishing greater oversight of public accounting firms.

Question 9

Under the Restatement Test,as discussed in the case in the text,Bily v.Arthur Young & Co.,which of the following is true regarding the action brought by ABC Bank against Selena based upon the loss of funds on Carl's loan?

Accepted Answer

The auditor may be held liable to a third party lender if the auditor is informed by the client that the audit will be used to obtain a loan in a certain amount, even if the specific lender remains unnamed.

Question 10

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

Accepted Answer

The Private Securities Litigation Reform Act lists a specific set of actions and guidelines an accountant must follow after identifying a potentially illegal activity. Depending on the circumstances, the accountant must immediately notify the board of directors, the audit committee, or the SEC.

Question 11

Which of the following is true regarding any affirmative defenses available under Section 20(a)of the Securities Exchange Act?

Accepted Answer

Regarding affirmative defenses, section 20(a) allows defendants to avoid liability when "the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the [underlying] violation or cause of action."

Question 12

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

Accepted Answer

The Securities Exchange Act of 1934 imposes liability for making fraudulent statements to the SEC.

Question 13

Under the Restatement Test,as discussed in the case in the text,Bily v.Arthur Young & Co.,which of the following is true regarding the effort by XYZ Bank to recover against Selena based upon Alice's default?

Accepted Answer

There is no liability where the auditor agrees to conduct the audit with the express understanding the report will be transmitted only to a specified bank and it is then transmitted to other lenders.

Question 14

Under which of the following are accountants civilly liable for misstatements and omissions of material facts made in registration statements the SEC requires?

Accepted Answer

Under Section 11 of the Securities Act of 1933, accountants are civilly liable for misstatements and omissions of material facts made in registration statements the SEC requires.

Question 15

Which of the following are penalties under the Sarbanes-Oxley Act for the willful violation of the section requiring the retention of working papers?

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires keeping working papers for five years starting with the end of the fiscal period in which the audit was conducted; and willful violation results in a fine, imprisonment up to 10 years, or both.

Question 16

Which of the following is accurate regarding Greg's assertion that Rhonda violated the accountant-client privilege?

Accepted Answer

An accountant-client privilege, the right of an accountant to refuse to reveal any information given to him during the course of providing accounting services to a client, is not recognized by the common law or by federal law. However, a number of states have adopted statutes granting some form of accountant-client privilege.

Question 17

What is Rhonda's contract with Greg to do audit work for him called?

Accepted Answer

When hired to perform a task, the accountant enters into a contract called an engagement letter with the client that makes certain explicit and implicit promises.

Question 18

Which of the following does the Sarbanes-Oxley Act of 2002 require regarding working papers?

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires keeping working papers for five years starting with the end of the fiscal period in which the audit was conducted.

Question 19

The contract that Paul and Teresa entered into setting the scope of Paul's duties is referred to as a[n] ___________.

Accepted Answer