Chapter 4 - M/c

Front 1

If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for:

(1) Strict liability for all damages incurred.

(2) Gross negligence.

(3) Either ordinary or gross negligence.

(4) Breach of contract.

Back 1

(2) A CPA will be liable to third parties who were unknown and not foreseeable for gross negligence. It should be pointed out that if the third party had been "foreseeable," liability might be established for ordinary negligence under a court following the Rosenblum v. Adler decision.

Front 2

Which of the following approaches to auditors' liability is least desirable from the CPA's perspective?

(1) The Ultramares approach.

(2) The Rosenblum approach.

(3) The Restatement of Torts approach.

(4) The Foreseen User approach.

Back 2

(2) The Rosenblum Approach provides more third parties the ability to recover damages from the CPA who has performed an engagement with ordinary negligence, and accordingly, is least desirable from the perspective of the CPA. The Ultramares Approach is most desirable, and the Restatement Approach (also known as the Foreseen User Approach) is between the two extremes.

Front 3

In cases of breach of contract, plaintiffs generally have to prove all of the following, except:

(1) The CPAs had a duty.

(2) The CPAs made a false statement.

(3) The client incurred losses related to the CPAs* performance.

(4) The CPAs breached their duty.

Back 3

(2) The plaintiffs need not prove that the CPA made a false statement, it is enough to
prove losses and breach of a duty that the CPA had.

Front 4

If the CPAs provided negligent tax advice to a public company, the client would bring suit under:

(1) The Securities Act of 1933.

(2) The Securities Exchange Act of 1934.

(3) The federal income tax law.

(4) Common law.

Back 4

(4) Negligent tax advice would ordinarily result in a suit brought under common law.
Note that the client is not covered under the Securities Act of 1933 or the Securities
Exchange Act of 1934.

Front 5

Which of the following cases reaffirmed the principles in the Ultramares case?

(1) Credit Alliance Corp. v. Arthur Andersen & Co.

(2) Rosenblum v. Adler.

(3) Ernst & Ernst v. Hochfelder.

(4) Escott v. BarChris Construction Corporation.

Back 5

(1) The Credit Alliance Corp. v. Arthur Andersen & Co. case reaffirmed the principles in
the Ultramares case by clarifying the conditions necessary for parties to be considered
third-party beneficiaries.

Front 6

Under common law, the CPAs who were negligent may mitigate some damages to a client by proving:

(1) Contributor negligence.

(2) The CPAs' fee was not material.

(3) The CPAs were not competent to accept the engagement.

(4) The CPAs' negligence was caused by the fact that they had too much work.

Back 6

(1) Contributory negligence, negligence on the part of the plaintiff, may be used as a
defense and the court may limit or bar recovery by a plaintiff whose own negligence
contributed to the loss.

Front 7

Under the Securities and Exchange Act of 1934, auditors and other defendants are faced with:

(1) Joint liability.

(2) Joint and several liability.

(3) Proportionate liability.

(4) Limited liability.

Back 7

(3) The Private Securities Litigation Reform Act of 1995 amended the Securities and
Exchange Act of 1934 to place limits on the amount of the auditors’ liability through
establishing proportionate liability.

Front 8

A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense?

(1) The investor has not proved fraud or negligence by the CPA.

(2) The investor did not actually rely upon the false statement.

(3) The CPA detected the false statement after the audit date.

(4) The false statement is immaterial in the overall context of the financial statements.

Back 8

(4) A CPA may avoid liability under the 1933 Act by proving that their negligence was
not the proximate cause of the plaintiff's loss. Accordingly, a finding that the false
statement is immaterial would in all circumstances represent a viable defense.

Front 9

Which of the following elements is most frequently necessary to hold a CPA liable to a client?

(1) Acted with scienter or guilty knowledge.

(2) Was not independent of the client.

(3) Failed to exercise due care.

(4) Did not use an engagement letter.

Back 9

(3) A CPA may be found liable to a client when due care has not been exercised.

Front 10

Which statement best expresses the factors that purchasers of securities registered under the Securities Act of 1933 need to prove to recover losses from the auditors?

(1) The purchasers of securities must prove ordinary negligence by the auditors and reliance on the audited financial statements.

(2) The purchasers of securities must prove that the financial statements were misleading and that they relied on them to purchase the securities.

(3) The purchasers of securities must prove that the financial statements were mislead­ing; then, the burden of proof is shifted to the auditors to show that the audit was performed with "due diligence."

(4) The purchasers of securities must prove that the financial statements were misleading and the auditors were negligent.

Back 10

(3) Under the Securities Act of 1933 purchasers of securities who sustain losses need only
prove that the financial statements contained in the registration statement were
misleading. Then the burden is shifted to the auditors to prove that they performed
the audit with "due diligence."

Front 11

The most significant result of the Continental Vending case was that it:

(1) Created a more general awareness of the possibility of auditor criminal prosecution.

(2) Extended the auditor's responsibility to all information included in registration statements.

(3) Defined the CPA's responsibilities for unaudited financial statements.

(4) Established a precedent for auditors being held liable to third parties under common law for ordinary negligence.

Back 11

(1) The Continental Vending case was a landmark in establishing auditors' potential
criminal liability under the Securities Exchange Act of 1934. The case involved
audited financial statements, was brought under statutory law, and did not involve
registration statements (which are covered by the Securities Act of 1933).

Front 12

The 1136 Tenants' case was important because of its emphasis upon the legal liability of the CPA when associated with:

(1) A review of annual statements.

(2) Unaudited financial statements.

(3) An audit resulting in a disclaimer of opinion.

(4) Letters for underwriters.

(AICPA, adapted)

Back 12

(2) The 1136 Tenants case was a landmark case concerning auditors' liability when they
are associated with unaudited financial statements