Q&A Hero

Q: This act increased protection available to whistleblowers. A. Sarbanes-Oxley Act of 2002. B. Securities Act of 1933. C. Securities Act of 1934. D. Securities Litigation Uniform Standards Act of 1998.

Q: In regards to the Foreign Corrupt Practices Act (FCPA), external auditors A. Are responsible for ensuring that sufficient internal controls are maintained. B. Should immediately report any discovered violation of the FCPA to the client's management. C. Should verify compliance with corporate codes of conduct. D. Are not subject to any penalties.

Q: Jay and Co., CPAs, audited the financial statements of Maco Corp. Jay intentionally gave an unqualified opinion on the financial statements even though material misstatements were discovered as a result of the audit. The financial statements and Jay's unqualified opinion were included in a 10-K (annual report filed with the SEC) for the company. Which of the following statements is correct regarding Jay's liability to a purchaser of the offering under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934? A. Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial statements. B. Jay will be liable if Jay was negligent in conducting the audit. C. Jay will not be liable if the purchaser's loss was under $500. D. Jay will not be liable if the misstatement resulted from an omission of a material fact by Jay.

Q: Under the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted A. Negligently. B. With independence. C. Without due diligence. D. Without good faith.

Q: Which of the following is something that the plaintiff must prove in order for an accountant to be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934? A. The accountant was ordinarily negligent. B. There was a material omission. C. The security involved was stock. D. The security was part of an original issuance.

Q: West & Company, CPAs, was engaged by Sand Corporation to audit its financial statements. West issued an unqualified opinion on Sand's financial statements. Sand has been accused of making negligent misrepresentations in the financial statements that Reed relied upon when purchasing Sand's stock. West was not aware of the misrepresentations and was not negligent in performing the audit. If Reed sues West for damages based on Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, West will A. Lose, because the statements contained negligent misrepresentations. B. Lose, because Reed relied upon the financial statements. C. Prevail, because some element of scienter must be proved. D. Prevail, because Reed was not in privity of contract with West.

Q: Rule 10b-5 under Section 10(b) of the Securities Exchange Act of 1934 imposes liability on an accountant for violation of certain duties. Which of the following is an investor not required to prove to recover from a CPA? A. A material, factual misrepresentation or omission. B. Reliance by the plaintiff on the financial statements. C. Damages suffered as a result of reliance on the financial statements. D. The security price was artificially inflated as a result of the materially misstated financial statements.

Q: Which statement is correct concerning an auditor's statutory legal liability? A. The Securities Act of 1933 broadened the auditor's common law liability and the Securities Exchange Act of 1934 narrowed it. B. The auditor has a greater burden of defense under the Securities Act of 1933 than under the Securities Exchange Act of 1934. C. Criminal liability only arises under state law. D. Statutory liability usually modifies the auditor's liability to the client.

Q: Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense? A. Generally accepted auditing standards and generally accepted fraud detection standards. B. Generally accepted auditing standards but not generally accepted fraud detection standards. C. Generally accepted fraud detection standards but not generally accepted auditing standards. D. Neither generally accepted auditing standards nor generally accepted fraud detection standards.

Q: While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under Section 11 of the Securities Act of 1933? A. The purchaser must prove that Larson was negligent in conducting the audit. B. The purchaser must prove that Larson knew of the material misstatements. C. Larson will not be liable if it had reasonable grounds, based on work performed, to believe the financial statements were accurate. D. Larson will be liable unless the purchaser did not rely on the financial statements.

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: Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that A. There was fraudulent activity by Worth. B. There was a material misstatement in the financial statements. C. Quincy relied on Worth's opinion. D. Quincy was in privity with Worth.

Q: Which of the following statements is (are) correct regarding the common law elements that must be proven to support a finding of constructive fraud against a CPA? I. The plaintiff has justifiably relied on the CPA's misrepresentation. II. The CPA has acted in a grossly negligent manner. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Q: Common law A. Requires that the CPA guarantee their work. B. Requires that the auditor performs work with due care. C. Requires that the auditor performs work with due diligence. D. Does not recognize the concept of constructive fraud.

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: Hark, CPA, failed to follow generally accepted auditing standards in auditing Long Corp.'s financial statements. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the Ultramares doctrine, if Third sues Hark, Hark will A. Win because there was no privity of contract between Hark and Third. B. Lose because Hark knew that banks would be relying on the financial statements. C. Win because there was contributory negligence on the part of Third in granting the loan. D. Lose because Hark was negligent in performing the audit.

Q: A CPA who fraudulently performs an audit of a corporation's financial statements will A. Probably be liable to any person who suffered a loss as a result of the fraud. B. Be liable only to the corporation and to third parties who are members of a class of intended users of the financial statements. C. Probably be liable to the corporation even though its management was aware of the fraud and did not rely on the financial statements. D. Be liable only to third parties in privity of contract with the CPA.

Q: The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by A. Expanding laws against fraud and obstruction of justice. B. Increasing criminal penalties for fraud and its cover-up. C. Strengthening sentencing guidelines applicable to large-scale frauds. D. All of the above are true.

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: Gold, CPA, rendered an unqualified opinion on the financial statements of Eastern Power Company. Egan purchased Eastern bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC included the audited financial statements. Gold is being sued by Egan under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements. To prevail, Egan must prove A. Neither scienter nor reliance. B. Reliance but not scienter. C. Scienter but not reliance. D. Both scienter and reliance.

Q: While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common-law negligence, Larson's best defense would be that the A. Audit was conducted in accordance with generally accepted auditing standards. B. Client was aware of the misstatements. C. Purchaser was not in privity of contract with Larson. D. Identity of the purchaser was not known to Larson at the time of the audit.

Q: Under the "Ultramares" doctrine, to which of the following parties will an accountant be liable for negligence? A. Parties in privity and foreseen parties. B. Parties in privity but not foreseen parties. C. Foreseen parties but not parties in privity. D. Neither foreseen parties nor parties in privity.

Q: Ford & Co., CPAs, issued an unqualified opinion on Owens Corp.'s financial statements. Relying on these financial statements, Century Bank lent Owens $750,000. Ford was unaware that Century would receive a copy of the financial statements or that Owens would use them to obtain a loan. Owens defaulted on the loan. To succeed in a common law fraud action against Ford, Century must prove, in addition to other elements, that Century was A. Free from contributory negligence. B. In privity of contract with Ford. C. Justified in relying on the financial statements. D. In privity of contract with Owens.

Q: In a common law action against an accountant in a state following the Ultramares doctrine, lack of privity is a viable defense if the plaintiff A. Can prove the presence of gross negligence which amounts to a reckless disregard for the truth. B. Bases the action upon fraud. C. Is the client's creditor who sues the accountant for negligence. D. Is the accountant's client.

Q: 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.

Q: Under the Rusch Factors doctrine, to which of the following parties will an accountant be liable for negligence? A. Only parties in privity and not those reasonably foreseeable third parties. B. Both parties in privity and reasonably foreseeable third parties. C. Only reasonably foreseeable third parties and not those parties in privity. D. Neither reasonably foreseeable third parties nor parties in privity.

Q: Why are plaintiffs motivated to bring actions under RICO? A. It pertains exclusively to auditors' actions. B. It guarantees that cases will be heard in state courts. C. It provides for treble damages. D. It holds auditors to standards that exceed reasonable assurance.

Q: What is the primary reason that Congress passed the Securities Litigation Uniform Standards Act of 1998? A. To overturn the Private Securities Litigation Reform Act of 1995. B. As a result of concerns that plaintiff attorneys could get around the Private Securities Litigation Reform Act of 1995 by filing class action lawsuits involving nationally traded securities in state courts. C. To provide for joint and several liability rather than proportionate liability. D. To ensure that all publicly-held companies receive similar audits.

Q: The Securities Exchange Act of 1934 A. Established a voluntary disclosure mechanism for issuers of publicly traded securities. B. Primarily relates to initial sales of securities to the public. C. Regulates all sales of securities. D. Regulates trading of securities subsequent to issuance.

Q: Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler for ordinary negligence to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover? I. Beckler was negligent in conducting the audit. II. Mac relied on the financial statements. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Q: Which of the following is not within the class of foreseen users of an accountant's work product? A. A prospective shareholder of the client. B. A lender bank when the accountant knows only that the client will use the financial statements to obtain a loan from an unspecified source. C. A bank when the accountant knows the client will rely on the financial statements as the basis for a loan from the bank. D. An investor if the accountant knows that the client is seeking capital from a select group of investors.

Q: A CPA's duty of due care to a client most likely will be breached when a CPA A. Gives a client an oral instead of a written report. B. Gives a client incorrect advice based on an honest error of judgment. C. Fails to give tax advice that saves the client money. D. Fails to follow generally accepted auditing standards.

Q: A CPA will most likely be negligent when the CPA fails to A. Correct errors discovered in the CPA's previously issued audit reports. B. Detect all of a client's fraudulent activities. C. Include a negligence disclaimer in the CPA's engagement letter. D. Warn a client's customers of embezzlement by the client's employees.

Q: When performing an audit, a CPA A. Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. B. Must strictly adhere to generally accepted accounting principles. C. Is strictly liable for failing to discover client fraud. D. Is not liable under any legal standard unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards.

Q: Which of the following is the best statement of the general standard of performance owed by an accountant in his or her professional work? A. To do the job correctly and discover all irregularities. B. To follow generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS). C. To act as a professional and not commit fraud. D. To exercise the skill and care of the ordinarily prudent accountant in the same circumstances.

Q: Which of the following is not required for establishing an auditor's liability for negligence? A. An undetected material misstatement. B. Failure to exercise due care. C. A connection between the auditor's negligence and a plaintiff's loss. D. A duty to conform to a standard of care.

Q: An auditor, using the same degree of due care as other members of the profession, fails to create an adequate allowance for bad debts. This occurrence is an example of A. Negligence. B. Fraud. C. An error in judgment. D. Constructive negligence.

Q: An audit client loses a lawsuit and the judgment is for an amount in excess of the contingent liability the client had recorded in the audited financial statements. The auditor, using the typical degree of due care as other members of the profession, determined that the amount of contingent liability recorded by the client in the financial statements for the pending lawsuit was reasonable, given the facts at the time of the audit. This judgment by the auditor is likely to result in A. Sanctions by the PCAOB levied against the individual auditor as well as the accounting firm. B. A successful lawsuit claiming auditor negligence. C. A successful lawsuit claiming breech of contract. D. No legal action whatsoever since due care was exercised.

Q: Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA? A. Gross negligence in applying generally accepted auditing standards. B. Ordinary negligence in applying generally accepted accounting principles. C. Identified third party users. D. Scienter.

Q: Which of the following is not one of the four general stages in the initiation and disposition of audit-related disputes? A. Discovery of fraud subsequent to issuance of the audit report. B. Users of financial statements incur losses. C. The legal process commencing with the filing of a lawsuit. D. Final resolution of the dispute.

Q: Privity of contract is the most restrictive view for plaintiffs under common law.

Q: To prevail in a suit alleging negligence, a third party must prove that the auditor had a duty to the auditor's client to exercise due care.

Q: To recover against an auditor in a negligence case, the client must prove that the client sustained an actual loss or damage.

Q: A tort is a breach of contract for which civil action may be taken.

Q: The auditor failing to complete the services agreed to in the contract with the client is subject to liability under breach of contract.

Q: Common law requires the auditor perform professional services with due care.

Q: An auditor can be guilty under federal statutory law if s/he was reckless in performance of her/his professional duties.

Q: An auditor can be sued by a third party under statutory law for willful violation of federal statutes.

Q: An auditor can be sued by a client for negligence under common law.

Q: Common law is written law enacted by the legislative branches of governments.

Q: Principles are stated at a conceptual level, not a detailed level.

Q: Ethical rulings are enforceable.

Q: Rules of Conduct are enforceable.

Q: The Principles of Professional Conduct set forth the minimum standards.

Q: The AICPA Code of Professional Conduct deals mainly with behavior and actions of individual auditors.

Q: When auditing a public company, a CPA must follow the auditing standards and Code of Professional Conduct of the PCAOB.

Q: Professionalism refers to the conduct, aims, or qualities that characterize or mark a given profession.

Q: The term "ethics" refers to a person's propensity to follow the laws of the land.

Q: 1. PartnerExamples include financial statement audits, reviews, and examinations of prospective financial information 2. Professional servicesAny person or entity, other than the member's employer, that engages a member or a member's firm to perform professional services 3. Practice of public accountingAny action initiated by a member that informs others of his or her status as a CPA or AICPA-accredited specialist 4. ClientA proprietor, part owner, or any individual who assumes the risks and benefits of firm ownership or who is otherwise held out by the firm to be the equivalent of any of the aforementioned 5. Attest engagementThe performance for a client by a member or a member's firm while holding out as CPA(s) of the professional services of accounting, tax, personal financial planning, litigation support services, and those professional services for which standards are promulgated by bodies designated by Council 6. Holding outAll services performed by member while holding out as a CPA

Q: Identify the primary purposes of Rules 201-203 of the Rules of Conduct.

Q: Which professional and regulatory bodies establish the ethical and professional rules for auditors of: (1) public companies and (2) private companies?

Q: Why do professions establish codes of conduct that define ethical behaviors for members of the profession?

Q: When auditing a public company, which of the following impairs an auditor's independence? A. Offering audit services as well as preparing the tax return for the same client. B. The auditor's spouse works in the assembly line of an audit client. C. Lack of fee disclosure in the client's annual report. D. The auditor has been a partner on the engagement for ten years.

Q: According to the profession's ethical standards, a CPA would be considered independent in which of the following instances? A. A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA. B. The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust. C. The CPA owns an office building and the mortgage on the building is guaranteed by a client. D. The CPA belongs to a country club client in which membership requires an annual fee.

Q: Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the same client? A. When the CPA, as legal agent, consummates a business acquisition for the client. B. When the CPA's audit fees and legal fees are not billed separately. C. When the CPA uses legal expertise to research a question of income tax law. D. When the legal services consist of an analysis of the terms of an existing lease agreement.

Q: In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement? A. The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information. B. A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information. C. Confidential client information is requested as part of a quality review of the CPA's practice by a review team authorized by the AICPA. D. An inquiry by a disciplinary body of a state CPA society requests confidential client information.

Q: An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee A. Was unusually large. B. Has not been paid and will not be paid for at least twelve months. C. Has not been paid and the client has filed a voluntary petition for bankruptcy. D. Was renegotiated during the prior year audit based on the need for expanded testing.

Q: In determining estimates of fees, an auditor may take into account each of the following, except the: A. Value of the service to the client. B. Degree of responsibility assumed by undertaking the engagement. C. Skills required to perform the service. D. Attainment of specific findings.

Q: A violation of the profession's ethical standards would most likely occur when a CPA who A. Is also admitted to the Bar represents on letterhead to be both an attorney and a CPA. B. Writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail. C. Is controller of a bank permits the bank to use the controller's CPA title in the listing of officers in its publications. D. Refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

Q: Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations? A. 10 days. B. 30 days. C. 50 days. D. 90 days.

Q: The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to A. Enable the CPA firm to attest to the reliability of the client. B. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients. C. Minimize the likelihood of association with clients whose management lacks integrity. D. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

Q: A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria. This policy is evidence of the firm's adherence to which of the following prescribed standards? A. Professional ethics. B. Supervision and review. C. Accounting and review services. D. Quality control.

Q: Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with A. Technical training that ensures proficiency as an auditor. B. Opportunities for career advancement outside the accounting firm. C. Knowledge required to fulfill assigned responsibilities. D. Knowledge required to perform a peer review.

Q: In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures for A. Determining the minimum procedures necessary for unaudited financial statements. B. Setting the scope of audit work. C. Deciding whether to accept or continue a client. D. Setting the scope of internal control study and evaluation.

Q: What is the primary purpose of the acceptance and continuance of client relationships and specific engagements element of quality control? A. Guarantee that firms do not associate with clients whose management lacks integrity. B. Provide reasonable assurance that firms do not associate with clients whose management lacks integrity. C. Guarantee that firms will not be sued as a result of association with a client. D. Provide reasonable assurance that firms will not be sued as a result of association with a client.

Q: Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures? A. Using the audit risk model. B. Using statistical sampling techniques. C. Assigning personnel to engagements. D. Considering audit risk and materiality.

Q: A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards by A. Adhering to generally accepted accounting principles. B. Implementing an appropriate system of quality control. C. Joining professional societies that enforce ethical conduct. D. Maintaining an attitude of independence in its engagements.

Q: A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards of A. Quality control. B. Due professional care. C. Supervision and review. D. Fieldwork.

Q: In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a A. Charitable organization in which an employee of the CPA serves as treasurer. B. Municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality. C. Restaurant where the CPA dines frequently. D. Company in which the CPA's private investment club owns a one-tenth interest.

Q: Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties and the current year's audit is scheduled to commence in one week. With respect to the past due audit fees, Mavis should A. Perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated. B. Perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay. C. Inform South Bay's management that the past due audit fees are considered an impairment of auditor independence. D. Inform South Bay's management that the past due audit fees may be considered a loan on which interest must be imputed for financial statement purposes.