Ans Doc187

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1. under the Sarbanes-Oxley Act of 2002, public accounting firms that audit financial statements of public companies are required to register with the Public Company Accounting Oversight Board (PCAOB) and submit to its rules.
True False

2. A professional may delegate his duty without the consent of the client.
True False

3. In June 2002 the European Union approved a regulation requiring all publicly traded companies in all EU states to prepare consolidated financial statements using IASB standards by no later than 2005.
True False

4. When an accountant fails to perform services for a client as agreed, an accountant is usually liable for all damages proximately caused by the accountant’s failure, including lost profits.
True False

5. An accountant performing an audit of a client has a specific duty to uncover an employee’s embezzlement from the client.
True False

6. Duty of trust requires the professional to maintain confidentiality.
True False

7. The Ultramares rule permits a nonclient to sue an accountant for negligence only if the accountant knows the name of the nonclient who uses the accountant’s work product.
True False

8. An accountant’s liability for constructive fraud extends to all persons who justifiably rely on the misstatement.
True False

9. Under Section 11 of the Securities Act of 1933, an auditor may escape liability by proving she had no reason to believe and did not believe that there were any misstatements or omissions of material fact in the financial statements she audited.
True False

10. Proof of aiding and abetting another person’s securities violation is not sufficient misconduct to overcome the privity requirement of Securities Act Section 12(A)(2).
True False

11. Under section 17(a) investor need to prove only negligence by the accountant.
True False

12. Under Securities Exchange Act Section 18(A), a purchaser must prove scienter by an accountant to impose liability on the accountant.
True False

13. By issuing a qualified opinion, an auditor escapes liability for defects in financial statements audited by the auditor.
True False

14. The Securities Exchange Act of 1934 does not impose the criminal liability for violation of any provision of the Act.
True False

15. A professional may be required to bring his working papers into court and to testify as to matters involving the professional’s discussions with the client regarding federal tax matters.
True False

16. Which of the following is (are) authorized to conduct periodic inspections of public company auditors in order to assess whether they are complying with the requirements of the Sarbanes-Oxley Act of 2002?
A. Public Company Accounting Oversight Board
B. Securities Exchange Commission
C. Federal Trade Commission
D. Board of directors

17. Which of the following will not impose liability on a professional to his client for breach of contract?
A. Failing to maintain the secrecy of a client’s trade secret.
B. Failing to complete an audit on time.
C. Failing to take all the tax deductions to which a client is entitled.
D. Failing to act as an ordinarily prudent professional would act.

18. Which of the following professional liabilities is based on common law concepts of ngligence?
A. Penal liability
B. Tort liability
C. Primary liability
D. Contractual liability

19. Which of the following is sufficient to establish that a professional has acted with scienter for purposes of common law fraud?
A. The professional’s careless consideration for the accuracy of his work.
B. The professional’s recklessly ignoring facts.
C. The professional’s failure to exercise due diligence.
D. The professional’s negligent misstatement of fact.

20. Hamish invested in the securities of the ABC Corporation (ABC). He lost a great deal of money on those securities after ABC’s President, Ney, admitted that financial statements about the profitability of ABC had been materially exaggerated. Andy Accountant (AA) had audited those statements and had issued an unqualified opinion that they complied with GAAS and GAAP. Hamish has sued AA using Section 10b of the Securities Act of 1934 as the legal basis of his suit. To succeed, Hamish must prove that:
A. AA acted with scienter.
B. Hamish was in privity of contract with ABC or AA.
C. AA acted negligently.
D. the material misstatement contained in the defective financial statements had the same effect as a fraud and deceit would have had.

21. The Ultramares rule permits which of the following nonclients to sue an accountant for negligent misrepresentation of a client’s financial position in financial statements audited by the accountant?
A. A securities investor who was not known to the accountant but who used the financial statements in a way that the accountant foresaw.
B. A bank that was not known to the accountant and whose use of the financial statements was not foreseen, but whose use of the financial statements was foreseeable.
C. A bank for whose primary benefit the accountant prepared the financial statements.
D. A securities investor whose use of the financial statements to purchase common shares was foreseeable.

22. In a state that uses the Ultramares rule, also known as the primary benefit test, which third party or parties may hold an accountant liable for common law negligence?
A. Only the client.
B. Only the client and a third party that the accountant knew would rely on the accountant’s work for a particular purpose.
C. Only the client, a third party that the accountant knew would rely on the accountant’s work for a particular purpose, and others who are in the same limited class as that third party.
D. Any third party that is a foreseeable user of the accountant’s work may hold him/her liable if that third party suffers a loss as a direct result of the accountant’s negligence.

23. In a state that uses the Restatement Sec. 552 rule, which third party or parties may hold an accountant liable for common law negligence?
A. Only the client.
B. Only the client and a third party that the accountant knew would rely on the accountant’s work for a particular purpose.
C. Only the client, a third party that the accountant knew would rely on the accountant’s work for a particular purpose, and others who are in the same limited class as that third party.
D. Any third party that is a foreseeable user of the accountant’s work may hold him/her liable if that third party suffers a loss as a direct result of the accountant’s negligence.

24. Which of the following tests does not require determining the professional negligence?
A. Primary benefit
B. Restatement of tort
C. Foreseeable users test
D. Scienter

25. Under the Restatement (Second) of Torts, which of the following nonclients may sue a professional for negligent misrepresentation of a client’s financial position in financial statements audited by the professional?
A. A securities investor whose use of the financial statements to purchase common shares was foreseeable.
B. A bank that was not known to the professional and whose use of the financial statements was not foreseen, but whose use of the financial statements was foreseeable.
C. A bank that was known to the professional but used the financial statements for a purpose that was not foreseen.
D. A securities investor who was not known to the professional but who used the financial statements for the same purpose as an investor whose use was known to the professional.

26. A broker who gives investment advice is not liable to the:
A. client.
B. bank.
C. nonclient.
D. publisher.

27. Under Section 11 of the Securities Act of 1933, in order to establish liability of an auditor, a plaintiff must prove that:
A. he/she is a purchaser of securities issued pursuant to a defective registration statement.
B. the auditor was negligent in preparing the registration statement.
C. the auditor acted with scienter in preparing the registration statement.
D. the auditor is not on duty at the time of registration.

28. Regarding financial statements that have been audited by an accountant and included in a 1933 Act registration statement, to prove due diligence under Section 11, the accountant must prove all the following, except:
A. that the accountant made a reasonable investigation into the accuracy of the audited financial statements.
B. that the accountant had reason to believe that the audited financial statements did not contain any misstatements or omissions of material fact.
C. that the accountant had no reason to believe and did not believe that the audited financial statements contained any misstatement or omissions of material fact.
D. that the accountant believed that the audited financial statements contained no misstatement or omissions of material fact.

29. Under Section 11 of the Securities Act of 1933, when a purchaser of securities sues an accountant:
A. the accountant can reduce his liability by proving that part of the purchaser’s loss was caused by a general decline in the price of all securities.
B. the purchaser must prove that he was in privity of contract with the accountant.
C. the purchaser must prove he relied on a misstatement or omission of material fact in financial statements audited by the accountant.
D. the purchaser must prove that the accountant failed to comply with GAAP and GAAS or otherwise prove the accountant’s negligence.

30. To hold an auditor liable under Section 18 of the Securities Exchange Act of 1934, a plaintiff must prove all the following except:
A. that the auditor acted with scienter.
B. that the plaintiff actually relied on a misstatement or omission of material fact.
C. that a misstatement or omission of material fact was contained in a document filed with the SEC under the 1934 Act.
D. that the plaintiff was a purchaser or seller of a security.

31. To hold an auditor liable under Rule 10b-5 of the Securities Exchange Act of 1934, a plaintiff must prove all the following except:
A. that the wrongful act had a connection with interstate commerce, the mails, or a national securities exchange.
B. that the wrongful act was in connection with the purchase or sale of a security.
C. that the auditor acted with scienter.
D. that the auditor aided and abetted his client’s fraud.

32. When a person knowingly breached the securities law, then he is liable to pay:
A. 50% of loss.
B. the entire loss.
C. nothing, as he is not liable.
D. the sum as court decides.

33. Which of the following is correct concerning qualified opinions, disclaimers of opinions, and unaudited financial statements?
A. When an auditor issues a qualified opinion regarding audited financial statements, the auditor is relieved of responsibility for mistakes in financial statements only to the extent the qualification is specifically expressed in the opinion letter.
B. An auditor who, due to the limited scope of an audit, disclaims any opinion as to the ability of the financial statements to present the financial position of a company has no liability for misstatements or omissions in the financial statements.
C. Opinion letters stating that an auditor totally disclaims his liability for false and misleading financial statements excuse an accountant from the duty to exercise ordinary skill and care.
D. Issuing unaudited statements creates a disclaimer as to their accuracy.

34. What is the penalty for tax fraud under the federal tax law?
A. $500
B. Imprisonment of 1 year
C. Fine of $10000
D. Fine of $500,000 and imprisonment of 5 years

35. What is the punishment for the violation of RICO?
A. Imprisonment of 10 years
B. Fine of $100000
C. Imprisonment of 10 years and fine up to $100000
D. Fine up to $250000 and imprisonment up to 20 years

36. The Private Securities Litigation Reform Act of 1995 requires an auditor:
A. to report to the Securities and Exchange Commission a client’s illegal act that has a material impact on the financial statements of the client when the client has failed to take remedial action.
B. to resign from an audit engagement when the client commits an illegal act that has a material impact on the financial statements of the client and the client has failed to take remedial action.
C. to inform a client’s shareholders of the client’s illegal act that has a material impact on the financial statements of the client when the client has failed to take remedial action.
D. to force a client to disclose to its shareholders and to the Securities and Exchange Commission a client’s illegal act that has a material impact on the financial statements of the client when the client has failed to take remedial action.

37. Which of the following is correct concerning the professional-client privilege and working papers produced by an auditor while auditing the records of a client?
A. Working papers are owned by the client, but the auditor has a right of access to them.
B. Working papers may be transferred to another auditor without the permission of the client.
C. The professional-client privilege is recognized in nearly all the states for federal tax matters.
D. The professional-client privilege usually belongs to the client.

42. If a stockholder sues a CPA for common law fraud based on false statements contained in the financial statements audited by the CPA, which of the following, if present, would be the CPA’s best defense?
A. The stockholder lacks privity to sue.
B. The false statements were immaterial.
C. The CPA did not financially benefit from the alleged fraud.
D. The contributory negligence of the client.

43. Brown, CPA, helped Cook organize a partnership that was actually an abusive tax shelter. Brown induced clients to participate by making false statements concerning the allowability of deductions and tax credits. As a result of these activities, Cook derived $100,000 gross income and Brown derived $50,000 gross income. What is Brown’s federal statutory liability under the provisions of the Internal Revenue Code specifically relating to promoting abusive tax shelters?
A. $10,000
B. $30,000
C. $50,000
D. $150,000

44. When CPAs fail in their duty to carry out their contracts for services, liability to clients may be based on
A. Breach of contract: Yes; Strict liability: Yes
B. Breach of contract: Yes; Strict liability: No
C. Breach of contract: No; Strict liability: No
D. Breach of contract: No; Strict liability: Yes

45. Nast Corp. orally engaged Baker & Co., CPAs, to audit its financial statements. The management of Nast informed Baker that it suspected the accounts receivable were materially overstated. Although the financial statements audited by Baker did, in fact, include a materially overstated accounts receivable balance, Baker issued an unqualified opinion. Nast relied on the financial statements in deciding to obtain a loan from Century Bank to expand its operations. Nast has defaulted on the loan and has incurred a substantial loss.
If Nast sues Baker for negligence in failing to discover the overstatement, Baker’s best defense would be that
A. Baker did not perform the audit recklessly or with an intent to deceive.
B. Baker was not in privity of contract with Nast.
C. The audit was performed by Baker in accordance with generally accepted auditing standards.
D. No engagement letter had been signed by Baker.

46. Gold, CPA, rendered an unqualified opinion on the 1987 financial statement of Eastern Power Co. Egan purchased Eastern bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC included the 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. Scienter: No; Reliance: No
B. Scienter: No; Reliance: Yes
C. Scienter: Yes; Reliance: No
D. Scienter: Yes; Reliance: Yes

47. The intent or scienter element necessary to establish a cause of action for fraud will be satisfied if the plaintiff can establish that the
A. Plaintiff actually relied on the defendant’s misrepresentation.
B. Plaintiff justifiably relied on the defendant’s misrepresentation.
C. Defendant made a false representation of fact.
D. Defendant made a misrepresentation with a reckless disregard for the truth.

48. West & Co., CPAs, was engaged by Sand Corp. 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, which Reed relied upon when purchasing Sand stock. West was not aware of the misrepresentations nor was it negligent in performing the audit. If Reed sues West for damages based upon Section 10(B) and rule 10b-5 of the Securities Exchange Act of 1934, West will
A. Lose, because Reed relied upon the financial statements.
B. Lose, because the statements contained negligent misrepresentation.
C. Prevail, because some element of scienter must be proved.
D. Prevail, because Reed was not in privity of contract with West.

49. Brown & Co., CPAs, Issued an unqualified opinion on the financial statement of its client, King Corp. Based on the strength of King’s financial statements, Safe Bank loaned King $500,000. Brown was unaware that Safe would receive a copy of the financial statements or that they would be used in obtaining a loan by King. King defaulted on the loan.
If safe commences an action for common law fraud against Brown, then to be successful, Safe must prove in addition to other elements that it
A. Was in privity of contract with Brown.
B. Was not contributorily negligent.
C. Was in privity of contract with King.
D. Justifiably relied on the financial statements.

50. One of the elements necessary to hold a CPA liable to a client for conducting an audit negligently is that the CPA
A. Acted with scienter or guilty knowledge.
B. Was a fiduciary of the client.
C. Failed to exercise due care.
D. Executed an engagement letter.

51. Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo’s financial statements. While performing the audit, Cox failed to discover certain irregularities which have subsequently caused Starr to suffer substantial losses. In order for Cox to be liable under common law, Starr at a minimum must prove that Cox
A. Acted recklessly or with a lack of reasonable grounds for belief.
B. Knew of the irregularities.
C. Failed to exercise due care.
D. Was grossly negligent.

52. In which of the following statements concerning a CPA firm’s action is scienter or its equivalent absent?
A. Actual knowledge of fraud.
B. Performance of substandard auditing procedures.
C. Reckless disregard for the truth.
D. Intent to gain monetarily by concealing fraud.

53. Ritz Corp. 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 six 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 basis 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.

54. Sharp & Co., CPAs, was engaged by Radar Corp. to audit its financial statements. Sharp issued an unqualified opinion on Radar’s financial statements. Radar has been accused of making negligent misrepresentations in the financial statements which Wisk relied upon when purchasing Radar stock. Sharp was not aware of the misrepresentations nor was it negligent in performing the audit. If Wisk sues Sharp for damages based upon Section 10(B) and Rule 10b-5 of the Securities Exchange Act of 1934, Sharp will
A. Lose, since the statements contained negligent misrepresentations.
B. Lose, since Wisk relied upon the financial statements.
C. Prevail, since some element of scienter must be proved.
D. Prevail, since Wisk was not in privity of contract with Sharp.