MODC
25 Pages

MODC

Course Number: ACCT 403, Spring 2011

College/University: Strayer

Word Count: 5719

Rating:

Document Preview

Module C - Legal Liability Module C Legal Liability Multiple Choice Questions 1. Auditors should not be liable to any party if they perform their services with: A. Ordinary negligence B. Regulatory providence C. Due professional care D. Good faith Difficulty: Easy Source: Original 2. A principle that may reduce or eliminates auditors' liability to clients is: A. Client's constructive negligence B. Client's...

Unformatted Document Excerpt
Coursehero >> District of Columbia >> Strayer >> ACCT 403

Course Hero has millions of student submitted documents similar to the one
below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

Course Hero has millions of student submitted documents similar to the one below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

C Module - Legal Liability Module C Legal Liability Multiple Choice Questions 1. Auditors should not be liable to any party if they perform their services with: A. Ordinary negligence B. Regulatory providence C. Due professional care D. Good faith Difficulty: Easy Source: Original 2. A principle that may reduce or eliminates auditors' liability to clients is: A. Client's constructive negligence B. Client's contributory negligence C. Auditors' ordinary negligence D. Auditors' gross negligence Difficulty: Easy Source: Original 3. Elliot Corp. is interested in buying Roger Corp. Prior to the purchase Elliot hired Adam & Co. to audit the financial statements of Roger. During the audit, Adam & Co. failed to discover a fraud that resulted in a material misstatement on Roger's financial statements. After the merger, the fraud was discovered and Elliot Corp. suffered substantial losses. If Elliot sues Adam & Co., Elliot must prove that Adam & Co: A. Acted recklessly or with lack of reasonable grounds for belief B. Knew of the instances of fraud C. Failed to exercise the appropriate level of professional care D. Demonstrated gross negligence Difficulty: Medium Source: Original MODC-1 Module C - Legal Liability 4. Which of the following statements is true concerning auditors' responsibilities during the audit? A. Auditors must exercise the level of care, skill, and judgment expected of a reasonably prudent auditor under the circumstances B. Auditors must plan the audit to gather sufficient competent evidence to guarantee the accuracy of the financial statements C. Auditors are strictly liable for failures to discover client fraud D. Auditors are not liable unless they commit gross negligence or intentionally disregard generally accepted auditing standards Difficulty: Easy Source: Original 5. Kerry CPA is the auditor for Sammy Corp. During the audit, Kerry discovers a material misstatement in Sammy's financial statements. Sammy's management tells Kerry that if the misstatement is corrected or if Kerry issues an opinion that indicates there is a material misstatement, the entity will likely have to declare bankruptcy and thousands of employees will lose their jobs. Which of the following statements is true if the misstatement is not corrected and Kerry issues an unqualified opinion on Sammy's financial statements? A. Kerry is liable only to third parties in privity of contract B. Kerry is liable only to known users of the financial statements C. Kerry probably is liable to any person who suffered a loss as a result of the fraud D. Kerry probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion Difficulty: Easy Source: Original MODC-2 Module C - Legal Liability 6. Mays bought McCovey Corp. common stock in an offering registered under the Securities Act of 1933. Hart & Co., CPAs, gave an unqualified opinion on McCovey's financial statements that were included in the registration statement filed with the SEC. Mays sued Hart under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Mays must prove that: A. There was fraudulent activity by Hart B. There was a material misstatement in the financial statements C. Mays relied on Hart's opinion D. Mays was in privity with Hart Difficulty: Easy Source: Original 7. To prevail in an action brought under common law, the plaintiff must show all of the following except: A. He or she was damaged or suffered a loss B. The financial statements were materially misstated C. Auditors knew the financial statements were materially misstated D. He or she relied on the financial statements Difficulty: Easy Source: Original 8. Failure to provide any care in fulfilling a duty owed to another, including reckless disregard for the truth, is called A. Breach of contract B. Ordinary negligence C. Privity D. Constructive fraud Difficulty: Easy Source: Original MODC-3 Module C - Legal Liability 9. Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are required to be filed with a regulatory body by October 1. Humphrey does not complete the audit until October 5. Lauren is late filing the financial statements and is fined $100,000 by the regulatory body. Lauren would most likely sue Humphrey claiming: A. Breach of contract B. Ordinary negligence C. Gross negligence D. Constructive fraud Difficulty: Easy Source: Original 10. Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to Key Largo Bank for a loan. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming: A. It was in privity of the contract B. It was a primary beneficiary C. It was a foreseen party D. It was a foreseeable party Difficulty: Easy Source: Original MODC-4 Module C - Legal Liability 11. Lauren hires Humphrey, a CPA, to provide an audit of her financial statements. The engagement letter includes a statement acknowledging that audited financial statements will be provided to financial institutions for a loan, but does not name any financial institutions. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves the loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming: A. It was in privity of the contract B. It was a primary beneficiary C. It was a foreseen party D. It was a foreseeable party Difficulty: Easy Source: Original 12. Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter includes a statement acknowledging that audited financial statements are needed for a filing with a regulatory body. Humphrey completes the audit and issues an unqualified opinion. Based on the audited financial statements, Key Largo Bank approves a loan to Lauren. Four months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue Humphrey claiming: A. It was in privity of the contract B. It was a primary beneficiary C. It was a foreseen party D. It was a foreseeable party Difficulty: Easy Source: Original 13. If an audit is performed for the benefit of a specific person or organization, that person or organization is known as a(n) A. Party to the contract B. Primary beneficiary C. Authorized recipient D. Prime benefactor Difficulty: Easy Source: Original MODC-5 Module C - Legal Liability 14. At the request of James Company's management, E.G. audited James Company's financial statements and was aware that James' management intended to deliver the financial statements to its 25 shareholders for the purpose of repurchasing their shares for $50 (the investors had originally purchased the shares for $5 per share). The audit was conducted in accordance with generally accepted auditing standards and the financial statements were prepared in accordance with generally accepted accounting principles. Later, the shareholders sued the auditors, claiming that if they fully realized the significance of disclosures about the market value of the assets, they could have received $75 per share from James Company. The shareholders' lawsuit will probably fail because: A. The shareholders did not suffer a loss B. The shareholders were not primary beneficiaries of the audit engagement and they have no standing to sue C. The shareholders failed to prove lack of appropriate professional care on the part of auditors D. The shareholders did not rely properly on the financial statements Difficulty: Hard Source: Original 15. Which of the following claims concerning the quality of auditors' work would least likely result in civil liability for damages? A. Gross negligence amounting to constructive fraud B. Failure to investigate possible fraud when other entities in the industry have experienced frauds C. Heedless disregard of evidence that the financial statements do not conform to generally accepted accounting principles D. Issuing an unqualified auditors' opinion when evidence of compliance with generally accepted accounting principles is not available Difficulty: Medium Source: Original MODC-6 Module C - Legal Liability 16. Lancaster & Co. CPAs is auditing the financial statements of Cooper Corporation. During the course of the audit, Cooper Corporation sent the following memo to the engagement partner: We have requested $1 million worth of products from Ladd Corporation with credit terms of net 30 days. Ladd has requested audited financial statements for its credit decision. We notified Ladd that our annual audit was in process and we would provide the audited financial statements to them as soon as they were completed. Which of the following statements is true with regards to this memo? A. The memo is an amendment to the engagement letter and makes Ladd Corporation a primary beneficiary of the audited financial statements B. The memo may move Ladd Corporation closer to a primary beneficiary and reposition them as third party with a standing to sue, depending on the jurisdiction of any future lawsuits C. The memo is only a courtesy and does not alter the terms of the engagement letter or change the nature of Ladd Corporation's standing to sue D. The memo is an additional contract placing Ladd Corporation in privity of contract Difficulty: Medium Source: Original 17. Section 11(b) of the Securities Act of 1933 provides that individuals may be sued and may be liable for investors' losses in connection with a public securities offering under one of these circumstances: A. The chair of the board of directors performed a reasonable investigation of facts in connection with writing the section in the registration statement concerning the use of the proceeds of the offering B. The independent auditors did not raise concerns about the excessive valuation of inventory held to support construction in progress, because their sample of inventory locations did not include remote geographical locations C. The president of the issuing entity had no reason to doubt the accuracy of the report of the consulting engineer, although the president did not conduct a separate reasonable investigation of her own D. The officers of the issuing entity were unaware of the excessive valuation of inventory held to support construction in progress and the financial statements reported at an overstated valuation in the balance sheet Difficulty: Medium Source: Original MODC-7 Module C - Legal Liability 18. When bringing suit against auditors under section 10(b) of the Securities Exchange Act of 1934, plaintiffs must allege and prove: A. The financial statements in the offering registration filing were materially misstated B. Auditors were aware of material misstatements in the financial statements C. Auditors were guilty of ordinary negligence and failed to discover material misstatements in the financial statements D. The plaintiffs purchased the specific securities through a public offering and thus have a right to sue Difficulty: Medium Source: Original 19. Which of the following parties is most likely to recover against auditors for losses resulting from acts of ordinary negligence? A. Third parties that auditors should have foreseen could rely on the client's financial statements B. The auditors' client C. Purchasers and sellers of securities under the Securities Exchange Act of 1934 D. Third parties whose reliance on the client's financial statements was reasonably foreseeable Difficulty: Easy Source: Original 20. An audit failure occurs when A. A client goes bankrupt or has serious financial difficulty B. Auditors fail to conduct the examination in accordance with generally accepted auditing standards, which results in the failure to identify material misstatements in the financial statements C. Auditors cannot collect audit fees owed to them by the client D. Auditors are sued by a third party Difficulty: Easy Source: Original MODC-8 Module C - Legal Liability 21. Third-party plaintiffs bringing action under common law need not prove A. They were damaged or suffered a loss B. Reliance on the financial statements C. The financial statements were direct cause of loss D. Breach of contract Difficulty: Easy Source: Original 22. Typical defenses for auditors in common law actions include all of the following, except A. The plaintiff was foreseen B. The plaintiff contributed to the failure to detect material misstatements C. The financial statements were not materially misstated D. The audit was conducted in accordance with generally accepted auditing standards Difficulty: Medium Source: Original 23. The Securities Act of 1933 A. Regulates trading in securities B. Approves and guarantees investments C. Regulates the initial issuance of securities D. Regulates the accounting profession Difficulty: Easy Source: Original 24. Which of the following would not need to be demonstrated by third parties bringing suit against auditors for losses sustained under the Securities Act of 1933? A. Auditors were aware of the materially misstated financial statements B. Third-party purchasers suffered a loss C. The client's financial statements contained a material misstatement D. Purchasers would need to demonstrate all of the above Difficulty: Easy Source: Original MODC-9 Module C - Legal Liability 25. The SEC Rule 10b-5 deals with A. Fraud in the purchase or sale of securities B. Penalties for willfully and knowingly violating the Securities Exchange Act of 1934 C. The use of the "due diligence" defense to avoid liability D. Integrated disclosure system for annual reports Difficulty: Hard Source: Original 26. The first significant case under section 11 of the Securities Act of 1933 charging auditors with not conducting a reasonable investigation was A. Rusch Factors v. Levin B. B. United States v. Benjamin C. Escott v. BarChris Construction Corp D. D. Ernst & Ernst v. Hochfelder Difficulty: Easy Source: Original 27. Foreseeable third parties are best described as A. Management of the entity B. Those third parties that have a direct relationship with auditors through a contract C. Those third parties who will rely on the audit and are specifically known by auditors D. Those third parties who potentially will rely on the audit but are not specifically known by auditors Difficulty: Medium Source: Original MODC-10 Module C - Legal Liability 28. Which of the following about the Securities Act of 1933 is not true? A. The plaintiff must prove damages or loss B. The plaintiff must prove they read the financial statements C. Any purchaser of securities may sue auditors D. The plaintiff need not prove that the materially misstated financial statements are the direct cause of the loss Difficulty: Easy Source: Original 29. The restatement of torts is a general legal doctrine that extends liability for ordinary negligence to A. Foreseeable third parties B. Foreseen third parties C. Primary beneficiaries D. All users of financial statements Difficulty: Medium Source: Original 30. Which of the following is not part of the definition of proportionate liability adopted by the Private Securities Litigation Reform Act? A. The total responsibility for loss is divided among all parties responsible for the loss B. Defendants who knowingly committed a violation of securities laws remain jointly and severally liable C. The full amount of damages may be recovered from any defendants involved in the action D. A solvent defendant's liability may be increased by 50 percent if other defendants are insolvent Difficulty: Medium Source: Original MODC-11 Module C - Legal Liability 31. Paula performed the audit of the financial statements of Abdul Company (a privately- held company currently not subject to filing requirements under the Securities Act of 1933 or Securities Exchange Act of 1934). Abdul Company is currently considering several alternatives for raising capital, including seeking financing from area banks or an initial public offering of its securities. Which of the following parties would have the lowest likelihood of successfully bringing suit for ordinary negligence against Paula? A. Abdul Company B. Purchasers of Abdul Company's securities in an initial public offering C. First State Bank, a bank with whom Abdul Company has not previously done business D. Simon Whitaker, a private investor who is considering acquiring Abdul Company Difficulty: Hard Source: Original 32. Which of the following factors would not influence third parties' abilities to bring suit against auditors for ordinary negligence under common law? A. The extent to which the third party relied upon the misstated financial statements and this reliance resulted in their loss B. The type of action or inaction by auditors that resulted in the failure to exercise appropriate levels of professional care C. The relationship between the auditors and third party D. The jurisdiction in which the action occurred Difficulty: Medium Source: Original 33. The Sarbanes-Oxley Act requires auditors performing an audit or review to maintain all engagement documentation for a period of A. 2 years B. 3 years C. 5 years D. 7 years Difficulty: Easy Source: Original MODC-12 Module C - Legal Liability 34. Which of the following statements concerning the Ultramares Corp. v. Touche case is not true? A. This case was brought under common law liability B. This case provided a test to determine whether a third party qualified as a primary beneficiary and could bring suit for ordinary negligence C. This case established the rights of third parties to bring suits against auditors under common law liability D. This case concluded that auditors' liability to third parties would be generally limited to gross negligence or fraud Difficulty: Medium Source: Original 35. In a common law action against auditors, lack of privity is a viable defense if the plaintiff A. Is the client's creditor who sues auditors for ordinary negligence B. Can prove gross negligence by auditors that amounts to a reckless disregard for the truth C. Is the auditors' client D. Bases the action upon fraud Difficulty: Easy Source: AICPA 36. Under the liability provisions of section 11 of the Securities Act of 1933, auditors may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the registration statement. Under 11, section auditors usually will not be liable to the purchaser A. If auditors can show contributory negligence on the part of the purchaser B. If auditors can demonstrate due diligence C. Unless the purchaser can prove privity with auditors D. Unless the purchaser can prove scienter on the part of auditors Difficulty: Medium Source: AICPA MODC-13 Module C - Legal Liability 37. Under the liability provisions of section 11 of the Securities Act of 1933, auditors may be liable to any purchaser of securities for certifying materially misstated financial statements that are included in the registration statement. Under section 11, which of the following must be proven by a purchaser of the security? A. Reliance on financial statements: Yes; Fraud by auditors: Yes B. Reliance on financial statements: Yes; Fraud by auditors: No C. Reliance on financial statements: No; Fraud by auditors: Yes D. Reliance on financial statements: No; Fraud by auditors: No Difficulty: Medium Source: AICPA 38. Beckler & Associates, CPAs, examined and issued 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 to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover? Beckler did not conduct the audit with the appropriate level of professional care. Mac relied on the financial statements. A. I only B. II only C. Both I and II D. Neither I nor II. Difficulty: Easy Source: AICPA MODC-14 Module C - Legal Liability 39. 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 failed to conduct the audit in accordance with generally accepted auditing standards B. The purchaser must prove that Larson knew of the material misstatements C. Larson will not be liable if it had reasonable grounds to believe the financial statements were accurate D. Larson will not be liable if the purchaser did not rely on the financial statements Difficulty: Easy Source: AICPA 40. 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, 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 Difficulty: Easy Source: AICPA MODC-15 Module C - Legal Liability 41. While conducting an audit of a publicly-traded entity, Wallace failed to identify material misstatements in its client's financial statements. Investors then sued Wallace in connection with this audit. Which of the following would not need to be demonstrated in order for the shareholders to successfully bring suit against Wallace? A. Wallace was in privity with the shareholders B. The shareholders relied upon the materially misstated financial statements C. Wallace acted with gross negligence in his audit D. The reliance on the materially misstated financial statements caused the shareholders' losses Difficulty: Easy Source: Original 42. Sun Corp. approved a merger plan with Cord Corp. One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co., CPAs. Sun had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses. For Frank to be liable under common law liability, Sun at a minimum must prove that Frank A. Knew of the irregularities B. Failed to exercise the appropriate level of professional care C. Demonstrated gross negligence D. Acted with scienter Difficulty: Easy Source: AICPA 43. Which of the following elements, if present, would support a finding of constructive fraud on the part of auditors? 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 Difficulty: Easy Source: AICPA MODC-16 Module C - Legal Liability 44. To be successful in a civil action under section 11 of the Securities Act of 1933 concerning liability for a materially misstated registration statement, the plaintiff must prove the A. Defendant's intent to deceive: Yes; Plaintiff's reliance on the registration statement: Yes B. Defendant's intent to deceive: Yes; Plaintiff's reliance on the registration statement: No C. Defendant's intent to deceive: No; Plaintiff's reliance on the registration statement: Yes D. Defendant's intent to deceive: No; Plaintiff's reliance on the registration statement: No Difficulty: Easy Source: AICPA 45. Which of the following is the best defense auditors can assert in a suit for common law fraud based on their unqualified opinion on materially misstated 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 Difficulty: Medium Source: AICPA 46. Under the anti-fraud provisions of section 10(b) of the Securities Exchange Act of 1934, auditors may by liable if they acted A. With ordinary negligence B. With independence C. Without due diligence D. Without good faith Difficulty: Easy Source: AICPA MODC-17 Module C - Legal Liability 47. How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors' liability to purchasers of securities beyond that of common law? A. Purchasers only have to prove loss caused by reliance on audited financial statements B. Privity with purchasers is not a necessary element of proof C. Purchasers have to prove either fraud or gross negligence as a basis for recovery D. Auditors are held to a standard of care described as professional skepticism Difficulty: Hard Source: AICPA 48. Which of the following is not a reason that the Class Action Fairness Act of 2005 will help auditors defend themselves in class action lawsuits? A. Federal courts will provide more scrutiny for class action lawsuits B. Federal courts have more resources at their disposal for managing class action lawsuits C. Federal courts will treat all plaintiffs equally D. Federal courts have more experienced judges Difficulty: Medium Source: Original 49. Under the Securities Act of 1933, which of the following defenses is related to auditors performing a reasonable investigation of the financial statements? A. Causation B. Contributory negligence C. Due diligence D. Prudent auditor Difficulty: Easy Source: Original MODC-18 Module C - Legal Liability 50. Which of the following is not a valid defense for auditors for liability to third parties for ordinary negligence under common law? A. The loss was caused by factors other than the materially misstated financial statements B. Lack of proper standing (relationship) to bring suit in that jurisdiction C. Lack of a privity relationship with auditors D. Third parties did not rely upon the financial statements Difficulty: Medium Source: Original Essay Questions 51. Distinguish between the "due diligence" and the "causation" defenses available to auditors under section 11 of the Securities Act of 1933. Section 11(b) describes the due diligence defense. If auditors can prove that a reasonable examination was performed, then auditors are not liable for damages. Section 11(e) defines the causation defense. If auditors can prove that the plaintiff's damages were caused by something other than the materially misstated financial statements, then they will not be liable. Difficulty: Medium Source: Original 52. What are the legal liabilities of auditors under common law? Legal liabilities of auditors may arise from lawsuits brought on the basis of the law of contracts or as tort actions for failure to exercise the appropriate level of professional care. Breach of contract is a claim that accounting or auditing services were not performed in the manner agreed. Tort actions cover complaints other than breach of contract such as fraud, deceit, and injury. Such actions are normally initiated by users of financial statements. Difficulty: Easy Source: Original MODC-19 Module C - Legal Liability 53. Sleek Corporation is a public corporation whose stock is traded on a national securities exchange. Sleek hired Garson Associates, CPAs, to audit Sleek's financial statements. Sleek needed the audit to obtain bank loans and to make a public stock offering so that Sleek could undertake a business expansion program. Before the engagement, Fred Hedge, Sleek's president, told Garson's managing partner that the audited financial statements would be submitted to Sleek's banks to obtain the necessary loans. During the course of the audit, Garson's managing partner found that Hedge and other Sleek officers had embezzled substantial amounts of money from the corporation. These embezzlements threatened Sleek's financial stability. When these findings were brought to Hedge's attention, Hedge promised that the money would be repaid and begged Garson not to disclose the embezzlements. Hedge also told Garson's managing partner that several friends and relatives of Sleek's officers had been advised about the projected business expansion and proposed stock offering, and had purchased significant amounts of Sleek's stock based on this information. Garson submitted an unqualified opinion on Sleek's financial statements, which did not include adjustments for or disclosures about the embezzlements and insider stock transactions. The financial statements and auditors' opinion were submitted to the banks Sleek normally does business with, including Knox Bank. Knox, relying on the financial statements and the auditors' report, loaned Sleek $2,000,000. Sleek's audited financial statements were also included in a registration statement prepared under the provisions of the Securities Act of 1933. The registration statement was filed with the SEC in conjunction with Sleek's public offering of 100,000 shares of its common stock at $100 per share. An SEC investigation of Sleek disclosed the embezzlements and the insider trading. Trading in Sleek's stock was suspended and Sleek defaulted on the Knox loan. As a result, the following legal actions were taken: Knox sued Garson. The purchasers of Sleek's stock offering sued Garson. Required: Would Knox recover from Garson for fraud? Would the purchasers of Sleek's stock offering recover from Garson Under the liability provisions of section 11 of the Securities Act of 1933? Under the antifraud provisions of section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934? MODC-20 Module C - Legal Liability a. Knox would recover from Garson for fraud. Since Knox suffered a loss because of reliance on materially misstated financial statements, he would need to demonstrate that Garson was aware of the embezzlement and insider transactions. Garson was aware of the embezzlement and insider transactions and, as such, committed fraud. It is important to note that auditors owe all parties responsibility for fraud. b. 1. The purchasers of Sleek's stock offering would recover from Garson under the liability provisions of section 11 of the Securities Act of 1933. Section 11 of the Act provides that anyone, such as auditors, who submit or contribute to a registration statement or allows material misrepresentations or omissions to appear in a registration statement, is liable to anyone purchasing the security who sustains a loss. Under the facts presented, Garson would not be able to establish a "due diligence" defense for a section 11 action because it knew that the registration statement contained materially misstated financial statements. b. 2. The purchasers of Sleek's stock offering would also recover from Garson under the antifraud provisions of section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Under Rule 10b-5, Garson's knowledge that the registration statement included materially misstated financial statements is considered a fraudulent action. Garson's action was intentional or, at a minimum, a result of gross negligence or recklessness. These purchasers relied on Garson's opinion on the financial statements and incurred a loss. Difficulty: Hard Source: AICPA adapted MODC-21 Module C - Legal Liability 54. For each of the following statements indicate by letter to which case it relates: Ultramares Corp. v. Touche State Street Trust v. Ernst Smith v. London Assurance Corp. 1136 Tenants' Corp. v. Max Rothenberg & Co. Ernst & Ernst v. Hochfelder Escott v. BarChris Construction Corp. Credit Alliance v. Arthur Andersen Requires a three point test, including that auditors demonstrate some action to acknowledge the existence of the third party and the third party's intent to rely on the opinion and financial statements. First United States case involving auditors. Auditors failed to follow basic professional standards but should have discovered gross overstatement in accounts. Established precedent for the plaintiff to prove scienter to recover damages under section 10(b) of the Securities Exchange Act of 1934. Auditors had a duty to inform clients of instances of fraud, even if hired for write-up work. Reckless misstatements, even if not deliberate, are the basis for liability to third parties. Found auditors liable for ordinary negligence under the Securities Act of 1933. 1. G, 2. C, 3. A, 4. E, 5. D, 6. B, 7. F Difficulty: Medium Source: Original MODC-22 Module C - Legal Liability 55. For each of the following statements indicate by letter to which case it relates: Ernst & Ernst v. Hochfelder United States v. Natelli(National Student Marketing) Rosenblum, Inc. v. Adler Fleet National Bank v. Gloucester Co. United States v. Benjamin Iselin v. Landau Auditors are liable to reasonably foreseeable third-party users for ordinary negligence. Conviction of auditors for willingly conspiring to defraud in an engagement related to pro forma financial statement. Established precedent for plaintiff's need to allege and prove scienter to impose section 10(b) liability. Third parties cannot rely on reviewed financial statements to the same extent as they can on audited financial statements. Auditors may be liable to third parties for ordinary negligence if these parties should be foreseen by auditors as relying on the financial statements. The court applied the restatement of torts doctrine to identify the plaintiff as a primary beneficiary. Auditors willfully violated Securities Exchange Act of 1934 by making false and misleading statements in a proxy statement. 1. C, 2. E, 3. A, 4. F, 5. D, 6. G, 7. B Difficulty: Medium Source: Original MODC-23 Module C - Legal Liability 56. Briefly explain the concept of proportionate liability. Why is the adoption of proportionate liability important to the accounting profession? Under proportionate liability, a defendant is required to pay a proportionate share of the court's damage award, depending upon the degree of fault determined by a judge or jury. For example, if a defendant is determined to be 40 percent at fault, they will be required to pay 40 percent of the damages awarded. This is important to the audit profession because under alternative legal concept of "joint and several liability", auditors could be held liable for all of losses incurred by third parties. This is especially true when the client had declared bankruptcy and was not able to provide any compensation to plaintiffs for damages. Difficulty: Medium Source: Original MODC-24 Module C - Legal Liability 57. Charlie Company is headquartered in Wisconsin. Charlie Company's auditors are headquartered in Minnesota. Bob lives in Bloomington, Indiana but works in Chicago, Illinois. Based on a tip from his boss, Bob calls his stockbroker (Jim, who offices in Chicago) and instructs him to purchase 1,000 shares of Charlie Company despite never having requested or reviewed Charlie Company's financial statements. Charlie Company is traded on the New York Stock Exchange and the transaction takes place 15 minutes later on the floor of the exchange. Charlie Company declares bankruptcy three months later and Bob loses his entire investment. Bob sues Charlie Company's auditors for ordinary negligence. The trial is scheduled for hearing in Madison, Wisconsin. Before the opening of the trial, the attorney for the auditors objects to the trial being held in Wisconsin, since the transaction between Bob and Jim took place in Illinois. The attorney asks that the trial be moved to Illinois. Required Why would the attorney ask for the trial to be moved? What defense would you raise if you were the auditors' attorney? Third parties have different standing to sue in different jurisdictions. In Wisconsin, Bob may be able to bring suit against auditors for ordinary negligence as a foreseeable party, while in Illinois Bob may have to prove he is a foreseen party or allege gross negligence or fraud on the part of auditors in order to have a right to bring suit. The best defense is a lack of cause between the materially misstated financial statements and Bob's loss. Bob never evaluated the financial statements, but purchased the stock through a tip from his boss. Auditors may also claim that they performed the audit with due professional care and according to generally accepted auditing standards. Difficulty: Hard Source: Original MODC-25

Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education.

Below is a small sample set of documents:

Strayer - ACCT - 403
Module D - Internal, Governmental, and Fraud AuditsModule DInternal, Governmental, and Fraud AuditsMultiple Choice Questions1. The definition of internal audit includes all of the following exceptA. Independent and objectiveB. Assurance and consulti
Strayer - ACCT - 403
Module E - Overview of SamplingModule EOverview of SamplingMultiple Choice Questions1. The set of items about which a statement is made in a sampling application is referred to asa (n):A. Sampling unitB. SampleC. Population unitD. PopulationDiff
Strayer - ACCT - 403
Module F - Attribute SamplingModule FAttribute SamplingMultiple Choice Questions1. Which of the following components of the audit risk model is most closely associated withattribute sampling?A. Audit riskB. Control riskC. Detection riskD. Inheren
Strayer - ACCT - 403
Module G - Variables SamplingModule GVariables SamplingMultiple Choice Questions1. Which component of the expanded audit risk model is most closely associated with the riskof incorrect acceptance?A. Analytical procedures riskB. Risk of Material Mis
Strayer - ACCT - 410
Ch20Student: _1.Chapter 7 of the Bankruptcy Act provides for:I. Reorganization.II. Liquidation.A.B.C.D.2.A transfer of assets by a company in financial difficulty is considered a sale if:I. the transfer includes a recourse provision allowing t
Strayer - ACCT - 410
Ch1Student: _1.Dickens Corporation issued nonvoting preferred stock with a fair market value of $1,200,000 in exchangefor all the assets and liabilities of D&E Corporation. D&E's net assets on the date of acquisition had a bookvalue of $800,000 and a
Strayer - ACCT - 410
Ch2Student: _1.A change from the cost method to the equity method of accounting for an investment in common stockresulting from an increase in the number of shares held by the investor requires:A. Only footnote disclosure.B. That the cumulative amou
Strayer - ACCT - 410
Ch3Student: _Fargo Transport purchased 80 percent of the stock of Bismarck Trucking on December 31, 2006, for$480,000. The equity section of Bismarck's balance sheet on that date was as follows:Identifiable net assets of Bismarck had book values equal
Strayer - ACCT - 410
Ch4Student: _Green Company purchased 100 percent of the common shares of White Company for $880,000. Selectedaccounts from Green's balance sheet at the date of combination are as follows:Selected accounts from the balance sheet of White at acquisition
Strayer - ACCT - 410
Ch5Student: _1.On January 1, 2008, Sun acquired 70 percent of Ryan's voting common stock for $450,000, an amount$30,000 higher than the underlying book value of Ryan's net assets. The fair value of Ryan's net assets wasequal to their book values. Any
Strayer - ACCT - 410
Ch6Student: _1.A parent and its 80 percent owned subsidiary have made several intercompany sales of noncurrent assetsduring the past two years. The amount of income assigned to the noncontrolling interest for the second yearshould include the noncont
Strayer - ACCT - 410
Ch7Student: _Rhett Corporation acquired 80 percent of Ennis Corporation's common stock at underlying book value. Thecompanies reported the following information for the years 2007 and 2008.During 2007, one company sold inventory to the other for $100,
Strayer - ACCT - 410
Ch8Student: _1.Cutler Company owns 80 percent of the common stock of Marina, Incorporated. Cutler acquires someof Marina's bonds from an unrelated party and holds them as a long-term investment. For consolidatedreporting purposes, how is the acquisit
Strayer - ACCT - 410
Ch9Student: _1.Westwood Company owns 90 percent of the common stock of Austin Corporation but none of Austin'spreferred stock. The common stock outstanding and the retained earnings of Austin Corporation are$1,010,000 and $930,000, respectively. Aust
Strayer - ACCT - 410
Ch10Student: _1.Wedgwood Corporation owns 90 percent of the voting common stock of Lenox Company. In the 2003consolidated cash flow statement, the net increase in cash was $84,000. Included in this amount were thefollowing:- Dividends paid to Wedgwo
Strayer - ACCT - 410
Ch11Student: _Waco Company, a U.S. corporation, acquired machinery for use in its operations from Lyon Manufacturingon October 2, 2008. The purchase price was 60,000 euros, payable in euros on January 15, 2009. Spot ratesfor euros on various dates are
Strayer - ACCT - 410
Ch12Student: _1.Accounting standards of the Financial Accounting Standards Board (FASB) and International AccountingStandards Board (IASB) may be characterized as being based on:A.B.C.D.2.Which of he following defines a foreign-based entity that
Strayer - ACCT - 410
Ch13Student: _1.When applying the operating profit and loss test to determine reportable segments, FASB 131 prescribesthat costs assigned to an operating segment should:A.B.C.D.2.Five of eight internally reported operating segments of Rollins Co
Strayer - ACCT - 410
Ch14Student: _1.The Securities and Exchange Commission is responsible for:A.B.C.D.2.Which of the laws below regulate the initial distribution of security issues in the United States?A.B.C.D.3.Which of the laws below requires the updating of
Strayer - ACCT - 410
Ch15Student: _1.A partnership is an association of two or more persons who carry on as co-owners a business for profit. Thepersons who form the partnership may be:I. individuals.II. corporations.III. fraternal nonprofit organizations.A.B.C.D.2
Strayer - ACCT - 410
Ch16Student: _The ABC Partnership decided to terminate its affairs as of December 31, 2008. The following informationis taken from the balance sheet that was prepared as of the date of termination:Partners A, B, and C share profits and losses 30:20:50
Strayer - ACCT - 410
Ch17Student: _1.Under the modified accrual basis of accounting, revenue should be recognized when it isA.B.C.D.2.Which of the following statements is(are) correct about the funds used by governmental entities?I. Funds are fiscal entities.II. Fu
Strayer - ACCT - 410
Ch18Student: _1.Which of the following funds use the accrual basis of accounting?I. enterprise fundII. agency fundIII. internal service fundA.B.C.D.2.IIIIIII, II, IIIA special revenue fund should be used in which of the following situation
Strayer - ACCT - 410
Ch19Student: _1.Which rule-making body is currently setting standards of financial reporting for private not-for-profituniversities and for public (governmental) universities?A.B.C.D.2.Private, not-for-profit entities should classify their net a
Air Force Academy - ECON - 111
NOT FOR CIRCULATIONNOT TO BE TAKEN AWAYTHE UNIVERSITY OF HONG KONGSchool of Economics & Finance?-? 2nd Semester ExaminationEconomics: ECON0301Theory of International TradeDr S ChiuMay 17, ?9:30-11:30a.m.Candidates may use any self-contained, sil
CUNY Baruch - MTH - 3020
Wednesday, February 23, 20118:07 AMlecture 7 Page 1lecture 7 Page 2lecture 7 Page 3lecture 7 Page 4lecture 7 Page 5lecture 7 Page 6lecture 7 Page 7
University of Phoenix - FIN - 366
Federal Reserve1Federal Reserve PaperEzzy IhekoronyeFIN/366April 12, 2011William RainwaterFederal Reserve2Federal ReserveRegulations can be defined as rules, procedure and laws set by government agencies inorder to achieve its objectives. In th
University of Phoenix - FIN - 366
Global Financial Stability1Global Financial StabilityEzzy IhekoronyeFIN/366April 28, 2011William RainwaterGlobal Financial Stability2Foreign Exchange RateForeign exchange market involves the purchase and sale of national currencies. It existsbe
Sabanc─▒ University - MGMT - 202
MGMT 202 TERM PROJECTFall 2008Financial Ratio AnalysisArelik A.Vestel Beyaz Eya Sanayi ve Ticaret A.Onur Urunlu 8139Erman TatloluInstructor : Trkan nder1. Ability to pay current liabilities:a. Current ratio Arelik :=Current ratio Vestel :== 1
University of Phoenix - ACC - 497
Chapter C:4Corporate Nonliquidating DistributionsLearning ObjectivesAfter studying this chapter, the student should be able to:1.Calculate current earnings and profits (E&P).2.Understand the difference between current and accumulated E&P.3.Determ
Berkeley - MRKT - 103
MarketingMARKETING INFORMATIONKnowledge is powerStrategy vs. implementationDistinction: information vs. insightWhat do we get/ measureCustomer/wants/needsSubstance analysisCompetitorsYouPerception analysisCompetitorsYouRelevance/effectiveness
Utah State - WC - 26
CS 3010 Report #4Information Storage & RetrievalIntroductionChapters 16 and 17 describe how XML and Databases are used to represent and storedata, along with the advantages for using them versus other storage techniques. UsingXML and databases as top
Southern State Community College - MGMT - 3125
1. Chapter 19058(Points: 2.5)The basic assumption of _ is that marketing to repeat customers is more profitable thanmarketing to first-time buyers.Error: Reference source not founda. customer segmentationError: Reference source not foundb. predictive
Southern State Community College - MGMT - 3125
1.Chapter19058Thebasicassumptionof_isthatmarketingtorepeatcustomersismoreprofitablethanmarketingtofirsttimebuyers.CorrectFeedbackA. customersegmentationB. predictivemodelingC. customervaluationD. datamanipulationStudentResponseE.lifetimeva
Southern State Community College - MGMT - 3125
Exam 1Yu CaoStarted: October 2, 2010 11:50 AMQuestions: 50FinishHelp50.03-073(Points: 2.0)Based on the research of Hofstede and England, and studies of culturalprofiles of other countries, which of the following values isnothigh in Japan?Aa.indivi
Southern State Community College - MGMT - 3125
1 04-025. (Points: 2.0)1Which of the following would likely occur in a high-contact culture?a. widening your eyes2 b. looking at your watch3 c. speaking faster4 d. touching while you speak2 04-059. (Points: 2.0)1 _ is the process of translating
Southern State Community College - MGMT - 3125
1 10-030. (Points: 2.0)1 While there are limitations on managerial opportunities for women in their owncountry, there are _for women to get expatriate assignments.a. unlimited opportunities2 b. no opportunities3 c. even more limitations on opportuni
Southern State Community College - MGMT - 3125
1 07-014. (Points: 2.0)1 David Lei noted that the single greatest impediment managers face when seeking tolearn or renew sources of competitive advantage is that _.a. great venture partners are hard to find2 b. technologies change very rapidly3 c. p
Southern State Community College - MGMT - 3125
1.InMiami,themostpopularCubanradiostationstartsbroadcastinginRussianfortwohoursdailytoreachthe300,000RussianspeakingpeoplethatliveinSouthFlorida.Theradiostationisusing_segmentation.StudentResponseValueCorrectAnswerFeedbackA.usagerateB.
GWU - ACC - 450
AUD 1 Engagement Responsibilities(20 questions)Highlight answer in yellowEmail to Acct5890@bergg.etsu.edu (rename file to include your last name)Name:[1] Which of the following is a conceptual difference between the attestation standards and general
GWU - ACC - 450
Chapter 2Professional StandardsChapter SummaryPractice Standards The accounting and auditing profession has several sets of practice standards as general guides for thequality of professional work. Three topics are explained in this chapter: generall
GWU - ACC - 450
Auditing[1]A CPA who is associated with the unaudited financial statements of a publicentity suggests revisions to the notes to provide adequate disclosure. If the clientdoes not make the necessary changes, the CPA should disclaim an opinion andA. Re
GWU - ACC - 450
InternationalAuditingandStudy1June 2002AssuranceStandardsBoardTheDeterminationandCommunicationofLevelsofAssuranceOtherthanHighIssued by the InternationalFederation of AccountantsThe mission of the International Federation of Accountants (IFAC)
GWU - ACC - 450
CHAPTER 2Professional StandardsLEARNING OBJECTIVESReviewCheckpointsExercises, Problems,and Simulations1.Name the various practice standards forinternal, governmental, and independentauditors and auditing firms, and identify theirsources.1452
GWU - ACC - 450
SOLUTIONS FOR MULTIPLE CHOICE-QUESTIONSLouwers, Ramsay, Sinason, & Strawser 20051.23.a.b.c.d.e.IncorrectIncorrectIncorrectIncorrectCorrectThis is an attestation to the prize promoter's claims.This is an audit engagement to give an opinion on
GWU - ACC - 450
Review, Discussion, True/False, and Multiple Choice QuestionsChapter 1Review Questions1. What is the primary goal of corporate governance?2. What is the primary mission of a public company?3. What is the role of a corporate governance gatekeeper?4.
GWU - ACC - 314
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9810010.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:GWU Test One (Ch 12,13,14)Started:September 16, 2010 9:16 AMSubmitted:September 16, 2010 10:48 AM
GWU - ACC - 314
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9810010.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:GWU Test 2 Ch 15, 16, 17Started:October 27, 2010 9:57 AMSubmitted:October 27, 2010 11:21 AMTime s
GWU - ACC - 314
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9810010.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:GWU Test 3 Ch 18-21Started:December 6, 2010 10:01 AMSubmitted:December 6, 2010 11:43 AMTime spent
GWU - ACC - 314
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9810010.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:GWU Final Exam (Ch 12-21) Part 1Started:December 13, 2010 9:46 AMSubmitted:December 13, 2010 10:28
GWU - ACC - 314
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9810010.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:Final Exam Part 2Started:December 13, 2010 10:32 AMSubmitted:December 13, 2010 11:16 AMTime spent
GWU - ACC - 314
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9810010.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:ACC314 Pre-TestStarted:August 19, 2010 9:03 AMSubmitted:August 19, 2010 9:15 AMTime spent:00:11:
GWU - ACC - 315
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9810010.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:Module 4 AssessmentStarted:October 15, 2010 4:08 PMSubmitted:October 15, 2010 6:08 PMTime spent:
GWU - BADM - 312
Quiz: Brigham/Houston: Fundamentals of Financial Mana.1 of 12http:/webquiz.ilrn.com/ilrn/bca/user/quiz-public/run;js.Web QuizAssignment Name: Brigham/Houston: Fundamentals of Financial Management, 12e, Chapter 4S ummary of ResultsTotal Possible: 36.
GWU - BADM - 312
uiz: Brigham/Houston: Fundamentals of Financial Mana.http:/webquiz.ilrn.com/ilrn/bca/user/quiz-public/run;js.Web QuizAssignment Name: Brigham/Houston: Fundamentals of Financial Management, 12e, Chapter 3S ummary of ResultsTotal Possible: 24.0 Time Sp
GWU - BADM - 312
Quiz: Brigham/Houston: Fundamentals of Financial Mana.http:/webquiz.ilrn.com/ilrn/bca/user/quiz-public/run;js.Web QuizAssignment Name: Brigham/Houston: Fundamentals of Financial Management, 12e, Chapter 2S ummary of ResultsTotal Possible: 14.0 Time S
GWU - BADM - 312
Quiz: Brigham/Houston: Fundamentals of Financial Mana.http:/webquiz.ilrn.com/ilrn/bca/user/quiz-public/run;js.Web QuizAssignment Name: Brigham/Houston: Fundamentals of Financial Management, 12e, Chapter 1S ummary of ResultsTotal Possible: 12.0 Time S
GWU - MTH - 316
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9821263.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:MTH 316 Quiz 8.3 and 9.1Started:November 22, 2010 7:09 PMSubmitted:November 22, 2010 7:18 PMTime
GWU - MTH - 316
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9821263.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:MTH 316 Quiz 8.1 and 8.2Started:November 15, 2010 6:43 PMSubmitted:November 15, 2010 7:11 PMTime
GWU - MTH - 316
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9821263.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:MTH 316 Quiz 9.2 and 9.3Started:November 29, 2010 5:56 PMSubmitted:November 29, 2010 6:19 PMTime
GWU - MTH - 316
View Attempthttp:/webctap.gardner-webb.edu/webct/urw/lc9821263.Your location: Assessments View All Submissions View AttemptView Attempt 1 of 1Title:MTH 316 Quiz 7.5 and 7.6Started:November 3, 2010 2:05 PMSubmitted:November 3, 2010 2:35 PMTime sp