Question 1

Differentiate between the officers and directors duty of care, duty of loyalty, and duty of good faith. How do these principle responsibilities of officers and directors relate to the business judgment rule?

Accepted Answer

The answer of Differentiate between the officers and directors duty...

Question 2

The Livingston & Haynes case involves the audit firm

Accepted Answer

The Livingston & Haynes case involves the audit firm failing to follow procedures designed to provide reasonable assurance of detecting illegal acts, which is a critical aspect of their responsibilities.

Question 3

Kay and Lee performed an audit required for Holligan Industries to extend a loan with Second National Bank & Trust. Kay and Lee may be liable for:

Accepted Answer

Kay and Lee are responsible for conducting a thorough audit of Holligan Industries in order to provide an accurate assessment of the company's financial health. If they do not exercise the degree of care and skill expected of them and this results in damages to Second National Bank & Trust, they can be held liable for ordinary negligence. The other answer choices are not relevant to the auditing process or the responsibilities of auditors.

Question 4

The main focus of the Con-Way case is the company's:

Accepted Answer

The Con-Way case involves multiple issues, including bribery of Philippine customs officials, payments to foreign officials at state-owned airlines, and the failure to properly record and disclose these illicit payments.

Question 5

In the Vertical Pharmaceuticals case, Deloitte & Touche was sued because

Accepted Answer

Vertical Pharmaceuticals claimed that Deloitte & Touche made false accusations of fraudulent conduct which led to the withdrawal of another public company's planned acquisition of Vertical.

Question 6

The defendant-auditors in the Anjoorian case argued, in their defense, that:

Accepted Answer

The defendant-auditors in the Anjoorian case argued all of the points listed: the need for a specific transaction to be contemplated, no liability to third party shareholders, and that the plaintiff's theory of damages is speculative and against public policy.

Question 7

Which Act requires firms who engaged in international operations to have internal controls and an audit committee?

Accepted Answer

The Foreign Corrupt Practices Act of 1977 (FCPA) requires firms who engage in international operations to have internal controls and an audit committee. The FCPA was enacted to prevent bribery and corrupt practices by U.S. companies in foreign countries. The internal controls and audit committee requirements are designed to ensure that companies have effective mechanisms in place to detect and prevent any illegal activities.

Question 8

Michael Trent Reznor, the lead singer in the band Nine Inch Nails, filed a lawsuit against Richard Szekelyi and the Navigent Group in the Reznor v. JAM, Inc. case alleging:

Accepted Answer

The lawsuit specifically alleged negligence, breach of fiduciary duty, and aiding and abetting fraud against Richard Szekelyi and the Navigent Group.

Question 9

The SEC v. Zurich Financial Services case deals with:

Accepted Answer

The case involved Zurich Financial Services using finite reinsurance transactions to improperly inflate their financial performance, which was the focus of the SEC's investigation.

Question 10

In the case of SEC v. Halliburton & KBR, the SEC charged Halliburton & KBR with

Accepted Answer

The SEC charged Halliburton & KBR with bribing Nigerian government officials in order to obtain construction contracts. There is no mention of fraudulent financial statements or off-loading merchandise at the country's piers in this case.

Question 11

A corporate director or officer may be able to avoid liability to the corporation or to its shareholders for poor business judgments by meeting the requirements of the

Accepted Answer

The Business judgment rule provides protection to corporate directors and officers from being held personally liable for decisions made in good faith and with reasonable care. This rule assumes that the directors and officers were acting in the best interest of the corporation and did not have any personal gain or interest in the outcome of the decision. Therefore, if the requirements of the Business judgment rule are met, the director or officer can avoid liability for poor business judgments. The Sarbanes-Oxley Act and Dodd-Frank Financial Reform Act are regulatory acts that address different aspects of corporate governance and reporting but do not provide protection from personal liability. The ethical reasoning rule is not a legal standard but rather a guideline for ethical decision-making.

Question 12

The standard of due care requires that a director or officer

Accepted Answer

The standard of due care requires that a director or officer act in good faith, exercise the care that an ordinarily prudent person would in similar circumstances, and act in a way that is in the best interests of the corporation. Therefore, all three choices (A, B, and C) are correct and the answer is D.

Question 13

The Insider Trading and Accounting Professionals case deals with

Accepted Answer

The Insider Trading and Accounting Professionals case deals with all of these issues. It involves the legality of insider trading by an employee of a CPA firm not working on a client's audit, tipping off a fellow employee to inside information about an audit client, and whether a partner with no involvement in an audit client can own stock of that client.

Question 14

With respect to the director duty of good faith, former Delaware Chancery Court Chief Justice Veasey defined good faith as

Accepted Answer

Former Delaware Chancery Court Chief Justice Veasey defined good faith as an honesty of purpose that leads to caring for the well-being of one's constituents, which includes not only shareholders but also other stakeholders such as employees, customers, and the community. It goes beyond narrow self-interest and requires directors to act in the best interests of the corporation as a whole. While choices A, C, and D are relevant aspects of director duties, they do not capture the essence of good faith as Veasey defined it.

Question 15

Negligent nonfeasance would be said to occur when

Accepted Answer

Negligent nonfeasance refers to a situation where an auditor fails to perform the required duties or procedures, which leads to a failure to detect issues or fraud. Option B describes a situation where the auditor fails to use appropriate accounting procedures, which could have detected fraudulent activities, leading to negligent nonfeasance. Options A, C, and D involve deliberate actions or inactions, which are not negligence.

Question 16

The business judgment rule applies to audit committee acts in each of the following instances except for:

Accepted Answer

The preparation of the audit report is the responsibility of the auditor, not the audit committee. The business judgment rule applies to the decisions made by the audit committee in matters related to hiring the auditor, approving audit services, and responding to deficiencies in internal controls.

Question 17

A unique aspect of the DHB (Point Blank Solutions) case is that it deals with

Accepted Answer

The DHB case is unique because it involves the complicity of outside directors and audit committee members in the fraud, highlighting governance failures.

Question 18

The difference between an auditor's services regarding reports 10Q and 10K is

Accepted Answer

The auditor provides "limited assurance" regarding 10Q, which means that the auditor has performed limited procedures to verify the financial information provided in the report. In contrast, for 10K, the auditor provides "reasonable assurance," indicating that the auditor has performed more extensive procedures to ensure the accuracy of the financial information presented.

Question 19

The duty of loyalty requires directors to

Accepted Answer

The duty of loyalty requires directors to act in the best interests of the corporation, not any particular stakeholder group such as shareholders or management. This means that they must prioritize the long-term success of the business over their own personal interests or the interests of any individual or group.

Question 20

The Caremark opinion dealt with which element of directors' obligations?

Accepted Answer

The Caremark opinion dealt with directors' fiduciary obligations to implement systems to ensure legal compliance and prevent wrongdoing within the company. It did not specifically address audit or financial reporting obligations.

Quiz 6: Legal, Regulatory, and Professional Obligations of Auditors