Chapter 20 Homework

Question 1

An auditor can be held criminally liable for:

A) Tort of contract for failing to follow due professional care.
B) Negligent acts when the third party has privity status.
C) Illegal acts under common law.
D) Illegal acts under statutory law.

Answer 1

Illegal acts under statutory law.

Question 2

An auditor, using the same degree of due care as other members of the profession, fails to identify an inadequate allowance for bad debts. This occurrence is an example of:

A) Constructive negligence.
B) Fraud.
C) Negligence.
D) An error in judgment.

Answer 2

An error in judgement.

Question 3

Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA?

A) Identified third party users
B) Scienter
C) Gross negligence in applying generally accepted auditing standards
D) Ordinary negligence in applying generally accepted accounting principles

Answer 3

Gross negligence in applying generally accepted auditing standards.

Question 4

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove: (Defendant’s Intent
to Deceive; Plaintiff’s Reliance on the Registration Statement)

A) No; Yes
B) Yes; No
C) Yes; Yes
D) No; No

Answer 4

No; No

Question 5

Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?

A) The auditor exercised due diligence in following PCAOB auditing standards but not generally accepted fraud detection standards.
B) The auditor exercised due diligence in following PCAOB auditing standards and generally accepted fraud detection standards.
C) The auditor exercised due diligence in following neither PCAOB auditing standards nor generally accepted fraud detection standards.
D) The auditor exercised due diligence in following PCAOB fraud detection standards but not generally accepted auditing standards.

Answer 5

The auditor exercised due diligence in following PCAOB auditing standards but not generally accepted fraud detection standards.

Question 6

What are the three main precedents regulating auditors’ liability?

Answer 6

Ultramares, Restatement, and Rosenblum.

Question 7

What established precedent matches the Ultramares Third-Party Approach?

Answer 7

Auditor’s must prove due diligence (known user).

Question 8

What established precedent matches the Restatement Third-Party Approach?

Answer 8

Auditors must prove due diligence (foreseen user).

Question 9

What established precedent matches the Rosenblum Third-Party Approach?

Answer 9

Third party must prove existence of scienter.

Question 10

The __________ approach requires auditors to be responsible to known financial statement users.

Answer 10

Ultramares

Question 11

The Restatement approach requires responsibility towards __________ users of the financial statements.

Answer 11

Foreseen

Question 12

The __________ approach assigns responsibility by the auditor to the narrowest category of financial statement users.

Answer 12

Ultramares

Question 13

The __________ approach includes responsibility toward any foreseeable users of the financial statements.

Answer 13

Rosenblum

Question 14

The third party user approach revolves around auditor __________.

Answer 14

Liability

Question 15

What standard(s) of liability must the 1933 Act have?

Answer 15

Auditors must prove due diligence.

Question 16

What standard(s) of liability must the 1934 Act have?

Answer 16

Auditors must prove due diligence, Third party must prove existence of scienter, and Auditors must prove good faith.

Question 17

The __________ requires registration of an initial stock sale.

Answer 17

1933 Act

Question 18

The 1933 Act requires __________ to prove a loss and misleading financial statements.

Answer 18

Third parties.

Question 19

Under the 1934 Act, third parties must prove __________.

Answer 19

Scienter

Question 20

The 1934 Act protects any person buying or __________ the security.

Answer 20

Selling

Question 21

The 1933 and 1934 acts include provisions for civil and __________ charges against CPAs.

Answer 21

Criminal.

Question 22

The Securities Exchange Act of 1934:

A) Established a voluntary disclosure mechanism for issuers of publicly traded securities.
B) Regulates ongoing reporting of securities listed and traded on exchanges.
C) Regulates all sales of securities.
D) Primarily relates to initial sales of securities to the public.

Answer 22

Regulates ongoing reporting of securities listed and traded on exchanges.