R5 - CPA Legal Liability

Question 1

An account is prohibited from showing working papers to anyone without the client’s permission, except:

Answer 1

Lawful subpoena, surviving member of the firm, quality control panel, AICPA/State Trial Board, or court proceedings.

Question 2

What is the majority rule (the law followed in the majority of states) regarding the liability of a CPA who negligently gives an opinion on an audit of a client’s financial statements?

Answer 2

The CPA is liable to anyone in a class of third parties whom the CPA knows will rely on the opinion.

Question 3

Ultramares limits the accountant’s liability for negligence to:

Answer 3

(i) parties in privity and (ii) intended third party beneficiaries; parties who are merely “foreseen” cannot recover.

Question 4

A suit for common law fraud may succeed only if the accountant acted with:

Answer 4

Scienter (knew that the statement was wrong or recklessly disregarded the truth.), or gross negligence.

Question 5

A plaintiff under rule 10b-5 of the Securities and Exchange Act of 1934, section 10(b) must prove:

Answer 5

Reliance on a misstatement and that the defendant acted with scienter.

Question 6

The accountant-client privilege can be claimed:

Answer 6

Only in those states that recognize the privilege.

Question 7

For a cause of action for negligence, the client must prove:

Answer 7

At least that the CPA failed to exercise due care