Module C

Question 1

Tort Liability

Answer 1

failure of auditors to exercise appropriate level of professional care

Question 2

Ordinary Negligence

Answer 2

lack of reasonable care

Question 3

Gross Negligence

Answer 3

lack of minimal care

Question 4

Fraud

Answer 4

a misrepresentation of fact an individual knows to be false

Question 5

Breach of Contract

Answer 5

Services not performed by auditors in manner described in contract

Question 6

Proof and Defenses: clients must show

Answer 6

1. Economic loss
2. Auditors breached contract (for breach of contract)
3. Auditors failed to exercise appropriate care (tort actions)
4. The breach of contract or failure of auditors to exercise the appropriate level of care caused the loss

Question 7

Proof and Defenses: auditor’s defenses

Answer 7

1. Auditors did not breach contract (breach of contract) or performed with appropriate level of care (tort)
2. Causation (something else caused client loss)
3. Contributory negligence (clients were partially responsible for loss)

Question 8

primary beneficiaries

Answer 8

known by name by auditors

Question 9

foreseen

Answer 9

parties who could reasonably be expected to rely on the auditors’’ work

Question 10

foreseeable

Answer 10

Parties whose decisions normally rely on audited F/S and opinions on those F/S

Question 11

proof and defenses: third parties must show

Answer 11

1. Economic loss
2. Auditors failed to exercise appropriate level of care
3. F/S contained a material misstatement
4. Loss caused by reliance on misstated F/S

Question 12

proof and defenses: third parties audit defenses

Answer 12

1. Lack of appropriate standing (relationship with auditor) to bring suit
2. Third party’s loss caused by factors other than the F/S and auditors examination (causation defense)
3. Audit conducted per GAAS (i.e., auditors weren’t negligent)

Question 13

Securities Act of 1933

Answer 13

Regulates initial issuance of securities by registrants to investing public

involves IPOs

Question 14

Scienter

Answer 14

a mental state embracing the intent to deceive, manipulate, or defraud

Question 15

Which of the following third parties would be considered foreseeable as defined for auditor liability?

a. Stockholders
b. Management of the company
c. Major bank with existing major loans with the client
d. Your grandma who might want to work there one day

Answer 15

d. Your grandma who might want to work there one day

Question 16

Tort liability is only an option under Common Law

True or False

Answer 16

True

Question 17

Acceptable defenses for an auditor being prosecuted under the securities and exchange act of 1934 include all EXCEPT:

a. Due Diligence (auditor performed the audit in accordance with GAAS)
b. Causation
c. F/S were not materially misstated
d. Loss was caused by a material misstatement

Answer 17

d. Loss was caused by a material misstatement