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Louwers3eMODCsolutions - Module C Legal Liability MODULE C...

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Module C - Legal Liability MODULE C Legal Liability SOLUTIONS FOR MULTIPLE CHOICE-QUESTIONS C.27 a. Incorrect Constructive fraud represents reckless behavior, not a lack of reasonable care. b. Incorrect Fraud represents intention to deceive. c. Incorrect Gross negligence is similar to constructive fraud and represents lack of minimal care. d. Correct Ordinary negligence represents lack of reasonable care and is often proven by demonstrating that auditors failed to follow GAAS in conducting the audit. C.28 a. Incorrect Joint and several liability can impose the entire amount of loss in a case against auditors, which is less favorable than proportionate liability. b. Incorrect The reasonably foreseeable user approach provides auditors with the greatest exposure to liability to third parties for ordinary negligence. c. Incorrect The foreseen third party approach is more favorable to auditors than the reasonably foreseeable approach, but auditors may still be exposed to the entire amount of the loss. d. Correct Proportionate liability is most favorable to auditors because they will only be liable for damages to the extent they were found to be at fault. C.29 d. Correct The difference between the perception of the users of the statements and auditors’ knowledge of the audit objective is known as the expectations gap. One common example of the expectations gap is users’ belief that a GAAS audit will uncover all instances of fraud. MODC-1
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Module C - Legal Liability C.30 a. Incorrect Breach of contract depends solely on the performance of auditors and the client per the contract (engagement letter). b. Correct A tort is a lawsuit filed by the plaintiff who believes that they have suffered damage due to another party’s failure to exercise the appropriate level of professional care. c. Incorrect Securities litigation is a term that defines criminal and civil actions regarding unfair or criminal practices in the purchase or sale of securities. d. Incorrect Constructive fraud is a term used to define repetitive actions that show a pattern of recklessness or disregard for the truth or other party’s well being. While constructive fraud may be the cause of the losses, the wording in the question does not suggest that such a fraud occurred. C.31 a. Incorrect This is the total amount of the loss, and auditors were not determined to be 100% at fault. b. Incorrect Auditors’ liability cannot be zero because they were found to be partially at fault. c. Correct Auditors pay 45%, which is the 30% at fault plus another 15% (or 50% of the level at fault) because they are the only solvent defendant. d. Incorrect Since auditors are the only solvent defendant, liability is not limited to the 30% at fault (see ( c ) above). C.32 a. Correct When auditors knowingly commit violations, the joint and several liability doctrine applies, and auditors pay all the damages as the only solvent defendant.
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