Q&A Hero

Q: Which of the following is not an attestation standard? A. Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report. B. The report shall identify the subject matter or assertion being reported on and state the character of the engagement. C. The work shall be adequately planned and assistants, if any, shall be properly supervised. D. A sufficient understanding of internal controls shall be obtained to plan the engagement.

Q: An attestation report should state that the use of the report is restricted to specified parties under all of the following circumstances except when: A. The criteria used to evaluate the subject matter are available only to specified parties. B. The report is an attest engagement to apply agreed-upon procedures. C. A written assertion on the subject matter of the report has not been provided by the responsible party. D. All of the listed scenarios are circumstances that would dictate that the use of the report is restricted to specific parties.

Q: Trust Service principles cover A. hardware design. B. confidentiality. C. software design. D. physical protection of computer systems.

Q: The type of report issued under a PrimePlus assurance engagement is likely which of the following? A. Unqualified. B. Assurance. C. Audit. D. Agreed-upon procedures.

Q: Direct services offered under PrimePlus include all of the following except: A. Accounting for the entity's income. B. Providing assurances about the quality of care. C. Supervising the entity's investments. D. Arranging for payment of care.

Q: In providing PrimePlus services, a CPA is likely to perform all of the following functions except: A. Observe and report on the quality of care provided to older individuals. B. Directly receive income and pay bills and provide an accounting for these transactions. C. Directly evaluate the quality of health care services provided by physicians and other medical caregivers. D. Perform assurance-related procedures by inspecting logs or other evidence to support that contracted services have been provided.

Q: Which of the following is not an aspect of the assurances provided by a CPA WebTrust report? A. Product or service quality. B. System availability. C. Confidentiality. D. Processing integrity.

Q: The expectation that an internal auditor does not accept gifts that may impair judgment is based on the principle of A. integrity. B. objectivity. C. confidentiality. D. competency.

Q: Which of the following procedures is not usually performed by the accountant during a review engagement of a nonpublic entity? A. Inquiry about actions taken at meetings of the board of directors that may affect the financial statements. B. Issuance of a report stating that the review was performed in accordance with standards established by the AICPA. C. Reading of the financial statements to determine if they conform with generally accepted accounting principles. D. Communication of any material weaknesses discovered during the consideration of internal control.

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: A compilation of prospective financial statements involves all of the following except: A. Performing analytical procedures. B. Assembling the statements based on the responsible party's assumptions. C. Issuing a compilation report. D. Considering whether the statements appear to be not obviously inappropriate.

Q: An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when I. Typing client-prepared financial statements, without modification, as an accommodation to a client. II. Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Q: IIA Standards include A. practice advisories. B. code of Ethics. C. interpretations. D. both practice advisories and the Code of Ethics.

Q: Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements? A. Assisting in adjusting the books of account for a partnership. B. Examining prospective financial statements. C. Processing financial data for clients of other accounting firms. D. Compiling an individual's personal financial statement to be used to obtain a mortgage.

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: Inquiry and analytical procedures ordinarily performed during a review of a nonpublic entity's financial statements include A. analytical procedures designed to identify material weaknesses in internal control. B. inquiries concerning actions taken at meetings of the stockholders and the board of directors. C. analytical procedures designed to test the accounting records by obtaining corroborating evidential matter. D. inquiries of knowledgeable outside parties such as the entity's attorneys and bankers.

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: Which of the following should be included in an accountant's standard report based upon the review of a nonpublic entity's financial statements? A. A statement that the review was performed in accordance with generally accepted review standards. B. A statement that a review consists principally of inquiries and analytical procedures. C. A statement that the accountant is independent with respect to the entity. D. A statement that a review is substantially greater in scope than a compilation.

Q: During a review of financial statements of a nonpublic entity, the CPA would be least likely to A. perform analytical procedures designed to identify relationships that appear to be unusual. B. obtain written confirmation from banks regarding loans to the entity. C. obtain reports from other accountants who reviewed a portion of the total entity. D. read the financial statements and consider their conformance with generally accepted accounting principles.

Q: Before performing a compilation of the financial statements of a nonpublic entity, an accountant should A. perform a thorough study and evaluation of the internal control system. B. complete a series of inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions. C. design working papers intended to provide sufficient competent evidential matter to afford a reasonable basis for a compilation opinion. D. obtain an understanding of the accounting principles and practices of the industry in which the entity operates.

Q: The Sarbanes-Oxley Act of 2002 grants the PCAOB the ability to undertake two functions over registered public accounting firms and persons associated with such firms. Briefly explain the purpose of the PCAOB, making sure to reference their two major functions.

Q: Briefly describe the Sarbanes-Oxley Act of 2002. Be sure to mention (1) who passed the Act, (2) its primary objectives, (3) major aspects of the Act, (4) the parties that it affects, and (5) its relationship to the SEC rules.

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: 62. One of the greatest sources of liability for auditors under the 1934 Act is Section 10(b) and the related Rule 10b-5, which states that it is unlawful for any person to defraud, make any untrue statement of a material fact, or engage in any act in connection with the purchase or sale of a security. Once a plaintiff has established that he or she can sue under Rule 10b-5, there are four elements that must be proven. List the four elements

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 most restrictive view under common law is that auditors have no liability to third parties who do not have a privity relationship with the auditor. Briefly define privity and the effect it has on the auditor, client, investors, and creditors under common law.

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: The Sarbanes-Oxley Act of 2002 is considered the most sweeping securities law since the 1933 and 1934 Acts. Which item in the list below was not part of the Sarbanes-Oxley Act of 2002? A. Enhances prosecutorial tool available in fraud cases. B. Legislates new guidelines for ethics and integrity for public accounting firms. C. Expands statutory prohibitions against fraud and obstruction of justice. D. Increases authorized penalties for securities and financial fraud. E. Strengthens the legal protections accorded whistleblowers.

Q: Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, a material misstatement in the financial statements went undetected. Ocean was unaware of this fact. The financial statements and Ocean's unqualified opinion were included in a registration statement and prospectus for an initial public offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the prospectus prior to the purchase but did not read it. The shares declined in value as a result of the misstatements in Drain's financial statements becoming known. Under which of the following acts is Sharp most likely to prevail in a lawsuit against Ocean? A. The Securities Exchange Act of 1934, the Securities Act of 1933, and the Sarbanes-Oxley Act of 2002 provide equal likelihoods of prevailing. B. The Securities Exchange Act of 1934. C. The Securities Act of 1933. D. The Sarbanes-Oxley Act of 2002.

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, which of the following must be proven by a purchaser of the security? A. The CPA committed fraud and the purchaser relied on the financial statements. B. The purchaser relied on the financial statements, but not that the CPA committed fraud. C. The CPA committed fraud, but not that the purchaser relied on the financial statements. D. Neither that the CPA committed fraud, nor that the purchaser relied on the financial statements.

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: In general, the third-party (primary) beneficiary rule as applied to a CPA's legal liability in conducting an audit is relevant to which of the following causes of action against a CPA? A. Fraud and constructive fraud, but not negligence. B. Fraud, but not constructive fraud or negligence. C. Constructive fraud and negligence, but not fraud. D. Negligence, but not fraud or constructive fraud.

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 suit by a purchaser against Larson for common-law fraud, Larson's best defense would be that A. larson did not have actual or constructive knowledge of the misstatements and the auditor followed PCAOB Auditing Standards in the audit. B. larson's client knew or should have known of the misstatements. C. larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit. D. larson was not in privity of contract with its client.

Q: Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements? A. Contributory negligence on the part of the client. B. A disclaimer contained in the engagement letter. C. Lack of privity. D. Lack of scienter.

Q: When performing an audit, a CPA will most likely be considered negligent when the CPA fails to A. detect all of a client's fraudulent activities. B. include a negligence disclaimer in the client engagement letter. C. warn a client of known internal control weaknesses. D. warn a client's customers of embezzlement by the client's employees.

Q: The Foreign Corrupt Practices Act requires that A. auditors engaged to examine the financial statements of public companies report all illegal payments to the SEC. B. public companies establish independent audit committees to monitor the effectiveness of their system of internal control. C. U.S. firms doing business abroad report sizable payments to non-U.S. citizens to the Justice Department. D. public companies devise and maintain an adequate system of internal control.

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: 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 these 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: 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 identify an inadequate 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 breach 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.