Audit Ch. 5

Front 1

A(n) ________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards.

A) business B) audit C) ethics D) process

Back 1

B) audit

Front 2

The expectation gap: A) exists between the auditor and the SEC. B) exists because auditors guarantee the accuracy of the financial statements. C) often results in unwarranted lawsuits against the auditor. D) is a legal concept supported by the federal courts.

Back 2

C) often results in unwarranted lawsuits against the auditor.

Front 3

) Audit risk is the risk there will be an audit failure for a given audit engagement. A) True B) False

Back 3

B) False

Front 4

The term "audit failure" refers to the situation when the auditor has followed auditing standards yet still fails to discover that the client's financial statements are materially misstated.

Back 4

B) False

Front 5

1) In the performance of an audit, a CPA: A) is legally liable for detecting an immaterial client fraud. B) must strictly follow GAAP for privately held clients. C) must exercise constructive professional care in the performance of their audit responsibilities. D) must exercise due professional care in the performance of their audit responsibilities.

Back 5

D) must exercise due professional care in the performance of their audit responsibilities.

Front 6

2) If an auditor fails to fulfill a certain requirement in the contract, they may be guilty of: A) contract fraud. B) breach of contract. C) constructive fraud. D) criminal neglect

Back 6

B) breach of contract.

Front 7

3) Recklessness in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users. This description is the legal term for: A) ordinary negligence. B) gross negligence. C) constructive fraud. D) fraud.

Back 7

C) constructive fraud.

Front 8

4) The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the: A) prudent person concept. B) common law doctrine. C) constructive care concept. D) vigilant person concept.

Back 8

A) prudent person concept.

Front 9

5) Auditors may be liable to their clients if they are found guilty of: A) Ordinary negligence Gross negligence Yes Yes B) Ordinary negligence Gross negligence No No C) Ordinary negligence Gross negligence Yes No D) Ordinary negligence Gross negligence No Yes

Back 9

A) Ordinary negligence Gross negligence Yes Yes

Front 10

6) Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely. This would not include: A) employees of the CPA firm. B) employees of the audit client. C) other CPA firms engaged to do part of the audit work. D) specialists employed by the CPA firm to provide technical advice on the audit.

Back 10

B) employees of the audit client.

Front 11

7) "Absence of reasonable care that can be expected of a person in a set of circumstances" defines: A) pecuniary negligence. B) gross negligence. C) extreme negligence. D) ordinary negligence

Back 11

D) ordinary negligence.

Front 12

8) An example of a breach of contract would likely include: A) an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees. B) a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. C) a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative. D) an auditor's claim that the client staff is unqualified.

Back 12

C) a CPA firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative.

Front 13

9) Privity of contract exists between: A) auditor and the federal government. B) auditor and third parties. C) auditor and client. D) auditor and client attorney.

Back 13

C) auditor and client

Front 14

10) An individual who is not party to the contract between a CPA and the client, but who is known by both and is intended to receive certain benefits from the contract is known as: A) a third party. B) a common law inheritor. C) a tort. D) a third-party beneficiary.

Back 14

D) a third-party beneficiary.

Front 15

11) Laws that have been passed by the U.S. Congress and other governmental units are: A) statutory laws. B) judicial laws. C) federal laws. D) common laws.

Back 15

A) statutory laws.

Front 16

12) The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called: A) separate and proportionate liability. B) shared liability. C) unitary liability. D) joint and several liability

Back 16

D) joint and several liability

Front 17

13) The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called: A) separate and proportionate liability. B) joint and several liability. C) shared liability. D) unitary liability.

Back 17

A) separate and proportionate liability.

Front 18

14) Fraud occurs when: A) a misstatement is made and there is both knowledge of its falsity and the intent to deceive. B) a misstatement is made and there is knowledge of its falsity but no intent to deceive. C) the auditor lacks even slight care in the performance in performing the audit. D) the auditor has an absence of reasonable care in the performance of the audit.

Back 18

A) a misstatement is made and there is both knowledge of its falsity and the intent to deceive.

Front 19

15) Which of the following most accurately describes constructive fraud? A) Absence of reasonable care B) Lack of slight care C) Knowledge and intent to deceive D) Extreme or unusual negligence without the intent to deceive

Back 19

D) Extreme or unusual negligence without the intent to deceive

Front 20

16) Which of the following most accurately describes fraud? A) Absence of reasonable care B) Lack of slight care C) Knowledge and intent to deceive D) Extreme or unusual negligence without the intent to deceive

Back 20

C) Knowledge and intent to deceive

Front 21

17) A third-party beneficiary is one which: A) has failed to establish legal standing before the court. B) does not have privity of contract and is unknown to the contracting parties. C) does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract. D) may establish legal standing before the court after a contract has been consummated.

Back 21

C) does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract.

Front 22

18) If the CPA negligently failed to properly prepare and file a client's tax return, the CPA may be liable for: A) the penalties the client owes the IRS. B) the penalties and interest the client owes. C) the penalties and interest the client owes, plus the tax preparation fee the CPA charged. D) the penalties and interest, the tax preparation fee, and the amount of tax that was underpaid.

Back 22

C) the penalties and interest the client owes, plus the tax preparation fee the CPA charged.

Front 23

19) Constructive fraud: A) is also known as recklessness. B) requires an intent to deceive. C) involves collusion with the client. D) is also known as breach of contract.

Back 23

A) is also known as recklessness.

Front 24

20) Which of the following statements is true? A) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit Yes Yes No B) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit No Yes No C) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit Yes No Yes D) Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit No No No

Back 24

A) Gross negligence may constitute constructive fraud - yes

Fraud requires the intent to deceive -yes All fraud should be detected during audit - no

Front 25

21) The laws that have been developed through court decisions are called: A) common laws. B) criminal laws. C) statutory laws. D) civil laws.

Back 25

A) common laws

Front 26

22) Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff accountant. Elise was negligent while auditing several of the firm's clients. Under these circumstances, which of the following statements is true? A) Elise would have no personal liability for negligence. B) Gregory & Hedrick is not liable for Elise's negligence because CPAs are generally considered to be independent contractors. C) Gregory & Hedrick would not be liable for Elise's negligence if Elise disobeyed specific instructions in the performance of the audits. D) Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work.

Back 26

D) Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in reviewing Elise's work.

Front 27

23) The legal term for when an auditor issues an audit opinion, knowing that an adequate audit was not performed is a: A) breach of contract. B) tort action for negligence. C) constructive fraud. D) fraud.

Back 27

C) constructive fraud.

Front 28

29) The standard of due care to which the auditor is expected to be held is referred to as the prudent person concept. A) True B) False

Back 28

A) True

Front 29

30) In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions does not extend to another partner's personal assets. A) True B) False

Back 29

A) True

Front 30

31) In a CPA firm operating as a limited liability partnership (LLP), the liability for one partner's actions extends to the firm's assets. A) True B) False

Back 30

A) True

Front 31

32) Statutory laws are laws that have been developed through court decisions rather than through the U.S. Congress and other governmental units. A) True B) False

Back 31

B) False

Front 32

33) The doctrine of joint and several liability is one factor that has contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs. A) True B) False

Back 32

A) True

Front 33

34) Several states have statutes that permit privileged communication between the client and auditor, allowing a CPA to refuse to testify in state and federal courts. A) True B) False

Back 33

B) False

Front 34

35) Gross negligence is the existence of extreme or unusual negligence with the intent to deceive. A) True B) False

Back 34

B) False

Front 35

1) The principal issue in cases involving alleged negligence is usually: A) if an an engagement letter was issued. B) the level of care required. C) if fraud was committed by upper-level management. D) whether the auditor is liable under civil or criminal laws.

Back 35

B) the level of care required.

Front 36

2) In thirdparty suits, which of the auditor's defenses contends no implied or expressed contract? A) Lack of duty B) Non-negligent performance C) Contributory negligence D) Absence of causal connections

Back 36

A) Lack of duty

Front 37

3) In connection with the audit of financial statements, an independent auditor could be responsible for failure to detect a material fraud if: A) statistical sampling techniques were not used on the audit engagement. B) the auditor planned the audit in a negligent manner. C) accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier. D) the fraud was perpetrated by one employee who circumvented the existing internal controls.

Back 37

B) the auditor planned the audit in a negligent manner.

Front 38

4) Which of the following is an illustration of liability to clients under common law? A) Client sues auditor for not discovering a theft of assets by an employee. B) Bank sues auditor for not discovering that borrower's financial statements are misstated. C) Combined group of stockholders sue auditor for not discovering materially misstated financial statements. D) The federal government prosecutes the auditor for knowingly issuing an incorrect audit report.

Back 38

A) Client sues auditor for not discovering a theft of assets by an employee.

Front 39

5) Which of the following is an illustration of liability under the federal securities acts? A) A client sues the auditor for not discovering a theft of assets by an employee. B) A bank sues the auditor for not discovering that the borrower's financial statements are misstated. C) A combined group of stockholders sues the auditor for not discovering materially misstated financial statements. D) The auditor sues a client for not cooperating during the engagement.

Back 39

C) A combined group of stockholders sues the auditor for not discovering materially misstated financial statements.

Front 40

6) A CPA firm normally uses one or a combination of four defenses when there are legal claims by clients. Which one of the following is generally not a defense? A) Lack of duty B) Nonnegligent performance C) Contributory negligence D) Foreseeable users

Back 40

D) Foreseeable users

Front 41

7) Tort actions against CPAs are more common than breach of contract actions because: A) there are more torts than contracts. B) the burden of proof is on the auditor rather than on the person suing. C) the person suing need prove only negligence. D) the amounts recoverable are normally larger.

Back 41

D) the amounts recoverable are normally larger.

Front 42

8) The principal issue to be resolved in cases involving alleged negligence is usually: A) the amount of the damages suffered by plaintiff. B) whether to impose punitive damages on defendant. C) the level of care exercised by the CPA. D) whether defendant was involved in fraud

Back 42

C) the level of care exercised by the CPA.

Front 43

9) In the auditing environment, failure to meet auditing standards is often: A) an accepted practice. B) a suggestion of negligence. C) conclusive evidence of negligence. D) tantamount to criminal behavior.

Back 43

C) conclusive evidence of negligence

Front 44

10) A common way for a CPA firm to demonstrate a lack of duty to perform is by use of a(n): A) expert witness' testimony. B) engagement letter. C) management representation letter. D) confirmation letter.

Back 44

B) engagement letter.

Front 45

11) To succeed in an action against the auditor, the client must be able to show that: A) the auditor was fraudulent. B) the auditor was grossly negligent. C) there was a written contract. D) there is a close causal connection between the auditor's behavior and the damages suffered by the client.

Back 45

D) there is a close causal connection between the auditor's behavior and the damages suffered by the client

Front 46

12) Matthews & Co., CPAs, issued an unqualified opinion on Dodgers Corporation. Millennium Bank, which relied on the audited financial statements, granted a loan of $200,00,000 to Dodgers Corporation. Dodgers subsequently defaulted on the loan. To succeed in an action against Matthews & Co., Millennium Bank must prove that the bank was: A) in privity of contract with Dodgers. B) in privity of contract with Millennium. C) free from contributory negligence. D) justified in relying on the financial statements in granting the loan.

Back 46

D) justified in relying on the financial statements in granting the loan.

Front 47

13) One of the changes in auditing procedure which was brought about as a result of the 1136 Tenants case was that auditors were encouraged to begin using: A) letters of representation. B) confirmation letters. C) engagement letters. D) billet doux letters

Back 47

C) engagement letters

Front 48

14) The King Surety Company wrote a general fidelity bond covering thefts of assets by the employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled $17,200 of company funds. When the activities were discovered, King paid Wilson the full amount in accordance with the terms of the fidelity bond, and then sought recovery against Wilson's auditors, Lynch & Merritt, CPAs. Which of the following would be Lynch & Merritt's best defense? A) King is not in privity of contract. B) The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards. C) Lynch & Merritt were not guilty either of gross negligence or fraud. D) Lynch & Merritt were not aware of the King-Wilson surety relationship.

Back 48

B) The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards.

Front 49

17) An example of auditor legal liability to third parties under common law would be the federal government prosecuting an auditor for knowingly issuing an incorrect audit report. A) True B) False

Back 49

B) False

Front 50

18) The 1136 Tenants case was a criminal case concerning a CPA's failure to uncover fraud during a financial statement audit. A) True B) False

Back 50

B) False

Front 51

19) Many litigation experts believe that a well written engagement letter significantly reduces the likelihood of adverse legal actions. A) True B) False

Back 51

A) True

Front 52

1) A financial institution sues the audit firm for failure to discover that a borrower's financial statements are materially misstated. This is an example of which of the following legal liability concepts? A) Liability to clients B) Liability to third parties under common law C) Civil liability under federal securities law D) Criminal liability

Back 52

B) Liability to third parties under common law

Front 53

2) Which of the following auditor's defenses usually means nonreliance on the financial statements by the user? A) Lack of duty B) Nonnegligent performance C) Absence of causal connections D) Contributory negligence

Back 53

C) Absence of causal connections

Front 54

3) A group typically included as "third parties" in common law is: A) Actual and potential stockholders Employees of client Yes Yes B) Actual and potential stockholders Employees of client No No C) Actual and potential stockholders Employees of client Yes No D) Actual and potential stockholders Employees of client No Yes

Back 54

A) Actual and potential stockholders - Yes Employees of client- Yes

Front 55

4) The major conclusion of the 1931 Ultramares case was that: A) ordinary negligence is insufficient for liability to third parties. B) third parties must file criminal charges, not civil charges, against the auditor. C) fraud or gross negligence is sufficient for liability to third parties. D) auditors have no liabilities to third parties.

Back 55

A) ordinary negligence is insufficient for liability to third parties

Front 56

5) Under common law, a foreseen user would be treated the same as: A) A primary beneficiary A known third party Yes Yes B) A primary beneficiary A known third party No No C) A primary beneficiary A known third party Yes No D) A primary beneficiary A known third party No Yes

Back 56

A) A primary beneficiary - Yes A known third party - Yes

Front 57

6) A broad interpretation of the rights of third-party beneficiaries holds that users that the auditor should have been able to foresee as being likely users of financial statements have the same rights as those with privity of contract. This is known as the concept of: A) foreseen users. B) foreseeable users. C) expected users. D) four-party contracts.

Back 57

B) foreseeable users.

Front 58

7) Which of the auditor's defenses is ordinarily not available when lawsuits are filed by a third party? A) Absence of causal connections B) Contributory negligence C) Non-negligent performance D) Lack of duty

Back 58

B) Contributory negligence

Front 59

8) According to the principle established by the Restatement of Torts case, foreseen users must be members of: A) any potential user group. B) a legally protected class. C) a reasonably limited and identifiable user group. D) a reasonably limited and established user group.

Back 59

C) a reasonably limited and identifiable user group.

Front 60

9) In an action against a CPA in a jurisdiction that follows the Ultramares doctrine, lack of privity is a viable defense provided the plaintiff: A) is the client's creditor who sued the CPA for negligence. B) can prove gross negligence. C) violated the Securities Act of 1933. D) violated the Securities Act of 1934.

Back 60

A) is the client's creditor who sued the CPA for negligence.

Front 61

10) Under common law, an individual or company that (1) does not have a contract with an auditor, (2) is known by the auditor in advance of the audit, and (3) will use the auditor's report to make decisions about the client company has: A) no rights unless an auditor is grossly negligent. B) no rights unless an auditor is fraudulent. C) no rights against an auditor. D) the same rights against an auditor as a client.

Back 61

D) the same rights against an auditor as a client.

Front 62

As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft? A) He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees. B) He would have no liability because privity of contract is lacking. C) He would be liable for losses attributable to his negligence. D) He would be liable only if it could be proven that he was grossly negligent.

Back 62

C) He would be liable for losses attributable to his negligence.

Front 63

13) The preferred defense in third party suits is: A) lack of duty to perform. B) nonnegligent performance. C) absence of causal connection. D) client fraud.

Back 63

B) nonnegligent performance.

Front 64

15) Although there is confusion caused by the differing views of liability to third parties under common law, the movement is clearly away from the foreseeable user approach. A) True B) False

Back 64

A) True

Front 65

16) The restatement of torts approach to the concept of foreseen users states that any users that the auditor should have reasonably been able to foresee as being likely users of financial statements have the same rights as those with privity of contract. A) True B) False

Back 65

B) False

Front 66

17) The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties, an auditor (1) must know and intend that the work product would be used by the third-party for a specific purpose, and (2) the knowledge and intent must be evidenced by the auditor's conduct. A) True B) False

Back 66

A) True

Front 67

1) An adequate system of internal control for SEC registrants was originally required by the: A) Sarbanes-Oxley Act of 2002. B) Securities Act of 1933. C) Foreign Corrupt Practices Act of 1977. D) Securities Act of 1934.

Back 67

C) Foreign Corrupt Practices Act of 1977.

Front 68

2) The increased litigation under the federal securities laws has resulted from: A) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys Yes Yes Yes B) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys Yes No No C) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys Yes Yes No D) The availability of class-action litigation The strict liability standards imposed on CPAs by the securities laws An excess of attorneys No No No

Back 68

C) The availability of class-action litigation: Yes The strict liability standards imposed on CPAs by the securities laws: Yes

An excess of attorneys: No

Front 69

3) Under the Securities Act of 1933, the auditor's responsibility for making sure the financial statements were fairly stated extends to: A) the date of the financial statements. B) the date the registration statement becomes effective. C) the date of the audit report. D) one year beyond the date of the financial statements.

Back 69

B) the date the registration statement becomes effective.

Front 70

4) Under the Securities Exchange Act of 1934, which type of organization is required to submit audited financial statements to the SEC? A) Every company with securities traded on national and over-the-counter exchanges B) Every corporation C) Every company issuing new securities D) Every corporation which is chartered by a state government

Back 70

A) Every company with securities traded on national and over-the-counter exchanges

Front 71

5) The Securities and Exchange Commission can impose all but which of the following sanctions? A) Suspend a CPA from auditing SEC clients. B) Prohibit a CPA from accepting new SEC clients for a period of time. C) Require a CPA to participate in continuing-education programs and make changes in their practice. D) Revoke a CPA license.

Back 71

D) Revoke a CPA license

Front 72

6) The Foreign Corrupt Practices Act (FCPA) of 1977: A) requires auditors to review and evaluate systems of internal control as a part of an audit. B) requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control. C) requires auditors to review client's internal control system in a manner which is thorough enough to judge whether client meets the requirements of the FCPA. D) requires auditors to file a report with the SEC if client's internal control system is inadequate.

Back 72

B) requires SEC registrants to maintain a reasonably complete and accurate set of records and an adequate system of internal control.

Front 73

7) While the Foreign Corrupt Practices Act of 1977 remains in effect, its internal control provisions have been largely superseded by which of the following? A) The Sarbanes-Oxley Act of 2002 B) The Racketeer Influenced and Corrupt Organization Act C) The Federal False Statements Statute D) The Federal Mail Fraud Statute

Back 73

A) The Sarbanes-Oxley Act of 2002

Front 74

8) Which of the following is an accurate statement regarding recent actions brought against accountants by clients and third parties? A) Litigants will first seek state remedies because of the availability of class-action litigation. B) Gross negligence by the auditor must be proven under the Securities Acts of 1933 and 1934. C) The greatest growth in CPA liability litigation bas been under the federal securities laws. D) The amount of damages that plaintiffs can receive is greater under common law than under the federal securities laws.

Back 74

C) The greatest growth in CPA liability litigation bas been under the federal securities laws.

Front 75

9) A major purpose of federal securities regulations is to: A) provide sufficient reliable information to the investing public who purchase securities in the marketplace. B) establish the qualifications for accountants who are members of the profession. C) eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public. D) provide a set of uniform standards and tests for accountants, attorneys, and others who practice before the Securities and Exchange Commission.

Back 75

A) provide sufficient reliable information to the investing public who purchase securities in the marketplace.

Front 76

10) The 2012 news of a massive alleged bribery scheme involving Wal-Mart has brought charges against the company under the: A) Securities Act of 1933. B) Securities Act of 1934. C) Foreign Corrupt Practices Act of 1977. D) Sarbanes-Oxley Act of 2002

Back 76

C) Foreign Corrupt Practices Act of 1977.

Front 77

11) Which of the following statements about the Securities Act of 1933 is not true? A) A third party that purchased securities described in the registration statement may sue the auditor for material misrepresentations or omissions in the audited financial statements. B) A third party user does not have the burden of proof that he/she relied on the financial statements. C) A third party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit. D) A third party user does not have the burden of proof that the loss was caused by the misleading statements.

Back 77

C) A third party user has the burden of proof that the auditor was either negligent or fraudulent in doing the audit.

Front 78

14) Under the Securities Exchange Act of 1934, most of the litigation against the auditor has been generated because of the auditor's involvement with the: A) 8-K form. B) 10-K form. C) 10-Q form. D) S-1 form.

Back 78

B) 10-K form

Front 79

17) Under the Securities Act of 1933: A) any party who relies on the company's audited financial statements can recover from the auditors. B) third-party users must prove that the auditor was negligent. C) the burden of proof is on the defendant. D) auditors face potential legal exposure for information contained in the Form 10-Q.

Back 79

C) the burden of proof is on the defendant.

Front 80

18) The partnership of Booth & Haynes, CPAs, has been engaged to examine the financial statements of Paul, Inc., in connection with the registration of Paul's securities with the Securities and Exchange Commission. Under these circumstances, which of the following statements is true? A) Booth & Haynes is assuming much greater third-party liability than it assumes on engagements under common law. B) If its examination is not fraudulent, Booth & Haynes may issue an appropriate disclaimer to the financial statements and thereby avoid liability. C) Booth & Haynes must incorporate if they wish to practice before the SEC. D) Booth & Haynes must be a large interstate firm if they wish to practice before the SEC.

Back 80

A) Booth & Haynes is assuming much greater third-party liability than it assumes on engagements under common law.

Front 81

21) The only parties who can recover from auditors under the Securities Act of 1933 are original purchasers of securities. A) True B) False

Back 81

A) True

Front 82

22) Under the Securities Act of 1933, a third party plaintiff does not have the burden of proof that he or she relied on the financial statements or that the auditor was negligent or fraudulent in doing the audit. Rather, the plaintiff need only prove that the audited financial statements contained a material misrepresentation or omission. A) True B) False

Back 82

A) True

Front 83

23) Companies with securities traded on national and over-the-counter exchanges are required to submit audited financial statements once every three years to the Securities and Exchange Commission. A) True B) False

Back 83

B) False

Front 84

25) The United States Supreme Court has ruled that outside professionals such as accountants who don't help run corrupt businesses cannot be sued under the provisions of the Foreign Corrupt Practices Act. A) True B) False

Back 84

B) False

Front 85

26) The Sarbanes-Oxley Act requires the CEO and CFO of a public company to certify the annual and quarterly financial statements filed with the PCAOB. A) True B) False

Back 85

B) False

Front 86

2) A CPA is subject to criminal liability if the CPA: A) refuses to turn over requested audit documentation to a client. B) performs an audit in a negligent manner. C) is knowingly involved with false financial statements. D) willfully breaches a contract with a client.

Back 86

C) is knowingly involved with false financial statements.

Front 87

3) Critical lessons learned after analyzing major criminal cases against auditors include the fact that: A) the partner, but not the audit staff, must be independent. B) transactions with related parties are an indication of fraud. C) an investigation of the integrity of management is an important part of deciding whether to accept a new client. D) accounting principles can be relied on exclusively in deciding if the financial statements are fairly presented.

Back 87

C) an investigation of the integrity of management is an important part of deciding whether to accept a new client.

Front 88

2) In order to protect themselves from legal liability, it is important that CPAs: A) are organized as sole-proprietors. B) accept client representations. C) understand the client's business. D) use engagement letters, not representation letters.

Back 88

C) understand the client's business