Module C

Question 1

A lack of reasonable care that may be characterized by the failure of auditors to follow GAAS in the conduct of the audit is known as:

Answer 1

ordinary negligence

Question 2

When accountants agree to perform a compilation or review of unaudited financial statements, the best way to avoid clients’ misunderstanding the nature of the work is to describe it completely in:

Answer 2

an engagement letter

Question 3

A group of investors sued Anderson, Olds, and Watershed, CPAs (AOW) for alleged damages suffered when the entity in which they held common stock went bankrupt. To avoid liability under the common law, AOW must demonstrate which of the following?

Answer 3

The audit was conducted in accordance with generally accepted auditing standards and with due professional care

Question 4

The Securities Act of 1933 and Securities Exchange Act of 1934 contain:

Answer 4

both civil liability provisions applicable to auditors and criminal liability provisions applicable to auditors

Question 5

Which Act?

Auditors must prove due diligence.

Answer 5

1933 Act

Question 6

Which Act?

Third party must prove existence of scienter

Answer 6

1934 Act

Question 7

Auditors must prove good faith

Answer 7

1934 Act

Question 8

The __________ requires registration of an initial stock sale

Answer 8

1933 Act

Question 9

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

Answer 9

third parties

Question 10

Under the 1934 Act, third parties must prove __________

Answer 10

scienter

Question 11

The 1934 Act protects any person buying or __________ the security

Answer 11

selling

Question 12

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

Answer 12

criminal

Question 13

Which of the following is a major difference in auditors’ liability under the Securities Act of 1933 and the Securities Exchange Act of 1934?

Answer 13

• The burden of proving reliance on misstated financial statements and the relationship between these financial statements and the economic loss.
• The auditors’ required degree of professional care

Question 14

Assume that auditors lost a civil lawsuit for damages and the court found total losses of $5 million. If the auditors were determined to be 30 percent at fault and were the only solvent defendants, what is the auditors’ likely obligation under proportionate liability?

Answer 14

$2,250,000

Question 15

Which of the following would be the auditors’ most likely defense in an action brought under the Securities Exchange Act of 1934?

Answer 15

The auditors acted in good faith and were not aware of the materially misstated financial statements

Question 16

Auditors should not be liable to any party if they perform services that met the standards of:

Answer 16

due care

Question 17

Third-party plaintiffs bringing action under common law need not prove

Answer 17

breach of contract

Question 18

To prevail in an action brought under common law, the plaintiff must show all of the following except:

Answer 18

auditors knew the financial statements contained a material misstatement

Question 19

Which of the following is not a valid defense for auditors’ liability to third parties for ordinary negligence under common law?

Answer 19

Lack of a privity relationship with auditors

Question 20

Which of the following statements is true concerning auditors’ responsibilities during the audit?

Answer 20

Auditors must exercise the level of care, skill, and judgment expected of a reasonably prudent auditor under the circumstances

Question 21

Foreseeable third parties are best described as

Answer 21

those third parties whose decisions normally rely on audited financial statements and opinions on those financial statements.

Question 22

Under the Securities Act of 1933, which of the following defenses is related to auditors performing a reasonable investigation of the financial statements?

Answer 22

Due dilligence

Question 23

Mays bought McCovey Corporation common stock in an offering registered under the Securities Act of 1933. Hart & Company, CPAs, gave an unqualified opinion on McCovey’s financial statements that were included in the registration statement filed with the Securities and Exchange Commission. Mays sued Hart under the provisions of the 1933 act that deal with omission of facts required to be in the registration statement. Mays must prove that:

Answer 23

The financial statements contained a material misstatement

Question 24

To be successful in a civil action under Section 11 of the Securities Act of 1933 against auditors for liability for a materially misstated registration statement, the plaintiff must prove which of the following?

Answer 24

• Auditors’ intent to deceive: No
• Plaintiff’s reliance on the registration statement: No

Question 25

Which of the following statements about the Securities Act of 1933 is not true?

Answer 25

The plaintiff must prove they read and relied upon the financial statements

Question 26

Which of the following would not need to be demonstrated by third parties bringing suit against auditors for losses sustained under the Securities Act of 1933?

Answer 26

Auditors were aware of the materially misstated financial statements

Question 27

Under the liability provisions of Section 11 of the Securities Act of 1933, auditors may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the registration statement. Under Section 11, auditors usually will not be liable to the purchaser

Answer 27

if auditors can demonstrate due diligence

Question 28

When bringing suit against auditors under Section 10(b) of the Securities Exchange Act of 1934, plaintiffs must allege and prove:

Answer 28

auditors were aware of material misstatements in the financial statements

Question 29

Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act?

Answer 29

The full amount of damages may be recovered from any defendants involved in the action

Question 30

According to Sarbanes–Oxley, accountants performing an audit or review must maintain all engagement documentation for a period of

Answer 30

7 Years