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Question
Ritz Corporation wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, Ritz hired Fein, CPA, to audit the financial statements of Stale. Based on the audited financial statements and Fein's unqualified opinion, Ritz acquired Stale. Within 6 months, it was discovered that the inventory of Stale had been overstated by $500,000. Ritz commenced an action against Fein. Ritz believes that Fein failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality, but is not able to prove that Fein either intentionally deceived it or showed a reckless disregard for the truth. Ritz also is unable to prove that Fein had any knowledge that the inventory was overstated. Which of the following two causes of action would provide Ritz with proper bases upon which Ritz would most likely prevail?
A. Negligence and breach of contract.
B. Negligence and gross negligence.
C. Negligence and fraud.
D. Gross negligence and breach of contract.
Answer
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Related questions
Q:
Which of the following statements is not true concerning assurance services?
A. The growth in assurance services has been driven in part by users' demands for more relevant information.
B. Assurance services focus on improving the quality of information or its context, for decision makers.
C. Unlike audit and attestation engagements, an engagement to perform assurance services does not require the CPA to consider information reliability.
D. Auditing and attestation services can be viewed as subsets of assurance services since there is overlap in their objectives.
Q:
The report of a CPA on a review of the financial statements of a nonpublic entity should not include a statement that
A. all information included in the financial statements is the representation of the entity's management.
B. the review was performed in accordance with generally accepted auditing standards.
C. the CPA is not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles.
D. a review consists principally of inquiries of company personnel and analytical procedures applied to financial data.
Q:
Which of the following procedures is not included in a review engagement of a nonpublic entity?
A. Inquiries of management.
B. Inquiries regarding significant events subsequent to the balance sheet date.
C. Any procedures designed to identify relationships among data that appear to be unusual.
D. A study and evaluation of internal control.
Q:
During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the problem, the CPA should
A. disclose the departure in a separate paragraph of the report.
B. issue an adverse opinion.
C. attach a footnote explaining the effects of the departure.
D. issue a compilation report.
Q:
An accountant's standard report on a compilation of a projection should not include
A. a statement that he or she does not express an opinion on the statements or assumptions.
B. a statement that a compilation of a projection is limited in scope.
C. a disclaimer of responsibility to update the report for events occurring after the report's date.
D. a statement that the accountant expresses only limited assurance that the results may be achieved.
Q:
Accepting an engagement to examine an entity's financial projections would most likely be appropriate if distribution of the projections were limited to
A. the general public on the entity's website.
B. potential stockholders who request a prospectus or a registration statement.
C. a bank with which the entity is negotiating for a loan.
D. all stockholders of record as of the report date.
Q:
Which of the following are prospective financial statements upon which an accountant may appropriately report for general use?
A. Pro forma financial statements.
B. Financial projections.
C. Partial presentations.
D. Financial forecasts.
Q:
Suits are often brought against auditors that allege that the auditors did not detect some type of fraud or defalcation. List the six defenses that the auditors could mount against client negligence claims.
Q:
Auditors can be held liable under two classes of law when sued by clients, investors, creditors, or the government. Identify and briefly explain both classes of law.
Q:
Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under Section 11, a CPA usually will not be liable to the purchaser
A. if there is contributory negligence on the part of the purchaser.
B. if the CPA can prove due diligence.
C. unless the purchaser can prove privity with the CPA.
D. unless the purchaser can prove scienter on the part of the CPA.
Q:
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
A. the plaintiff's reliance on the registration statement and the defendant's intent to deceive.
B. neither the plaintiff's reliance on the registration statement nor the defendant's intent to deceive.
C. the plaintiff's reliance on the registration statement but not the defendant's intent to deceive.
D. the defendant's intent to deceive but not the plaintiff's reliance on the registration statement.
Q:
Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?
A. The CPA is liable only to third parties in privity of contract with the CPA.
B. The CPA is liable only to known users of the financial statements.
C. The CPA probably is liable to any person who suffered a loss as a result of the fraud.
D. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.
Q:
An auditor can be held criminally liable for
A. illegal acts under common law.
B. illegal acts under statutory law.
C. negligent acts when the third party has privity status.
D. tort of contract for failing to follow due professional care.
Q:
Which of the following represents the order from the least assurance to the most assurance provided for the types of services provided?
A. Review, compilation, audit.
B. Compilation, review, audit.
C. Audit, review, compilation.
D. Audit, compilation, review.
Q:
Which of the following procedures is more likely to be performed in a review engagement of a nonpublic entity than in a compilation engagement?
A. Gaining an understanding of the entity's business transactions.
B. Making a preliminary assessment of control risk.
C. Obtaining a representation letter from the chief executive officer.
D. Assisting the entity in adjusting the accounting records.
Q:
When an accountant compiles a nonpublic entity's financial statements that omit substantially all disclosures required by generally accepted accounting principles, the accountant should indicate in the compilation report that the financial statements are
A. restricted for internal use only by the entity's management.
B. not to be given to financial institutions for the purpose of obtaining credit.
C. compiled in conformity with a comprehensive basis of accounting other than generally accepted accounting principles.
D. not designed for those who are uninformed about the omitted disclosures.
Q:
Which of the following would an accountant not need to know when conducting a compilation?
A. The accounting principles and practices of the industry in which the entity operates.
B. A general understanding of the nature of the entity's business transactions and the form of its accounting records.
C. The accounting basis on which the financial statements are to be presented.
D. The accountant would need to know all of the other items listed when conducting a compilation.
Q:
In a review engagement, the accountant must make all of the following inquiries except those to:
A. Identify subsequent events having a material effect on the statements.
B. Understand internal controls.
C. Identify actions taken at stockholders' meetings.
D. Ascertain whether statements are in accordance with GAAP.
Q:
During a review of the financial statements of a nonpublic entity, an accountant becomes aware of inadequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentations, the accountant should
A. issue an adverse opinion.
B. issue an "except for" qualified opinion.
C. disclose this departure from generally accepted accounting principles in a separate paragraph of the report.
D. express only limited assurance on the financial statement presentations.
Q:
Which of the following procedures is usually included in a review engagement of a nonpublic entity?
A. The confirmation of accounts receivable.
B. A study and evaluation of internal control.
C. An inquiry concerning subsequent events.
D. The observation of physical inventory counts.
Q:
What type of liability has the Private Securities Litigation Reform Act of 1995 created for cases filed under federal statutory law? How did this change from previous legislation? How has this impacted the cases against auditors and the way cases are now presented?
Q:
Section 11 under the Securities Act of 1933 treats claims against auditors more favorably than common law. What two things does a plaintiff need to prove to have a case against the auditor of a company in which she purchased new investments? What does the auditor have to do to have the case dismissed?
Q:
The party responsible for assumptions identified in the preparation of prospective financial statements is usually
A. a third-party lending institution.
B. the entity's management.
C. the reporting accountant.
D. the entity's independent auditor.
Q:
Limited assurance is provided in a review engagement.
Q:
Examples of attest engagements include examination, review, and agreed-upon procedures engagements.
Q:
Internal auditors fall into two primary categories-assurance services and consulting services. Briefly explain these two categories in relation to internal auditors.
Q:
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph
A. is considered an "except for" qualification of the opinion.
B. violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
C. necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."
D. is appropriate and would not negate the unqualified opinion.
Q:
When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the
A. possibility of purchasing certain assets rather than leasing them.
B. capability of extending the due dates of existing debt.
C. appropriateness of changing depreciation methods from double declining balance to straight line.
D. marketability of property and equipment that management plans to keep.
Q:
When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the
A. periods presented plus the one preceding period.
B. current period only.
C. current period and those of the other periods presented.
D. current and immediately preceding period only.
Q:
A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.