Chapter5 - final

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CHAPTER 5 Multiple-Choice Questions 1. easy d While performing services for their clients, professionals have a duty to provide a level of care which is: a. free from judgment errors. b. superior. c. greater than average. d. reasonable. 2. easy b Auditors who fail to exercise due care in their performance of professional services may be liable for: a. punitive liability. b. breach of contract. c. excess liability. d. none of the above. 3. easy b Which of the following may give rise to a business failure? a. An erroneous audit opinion is issued. b. Management may make ill-advised business decisions. c. Auditors may fail to uncover employee fraud. d. Poorly trained auditors may perform a company’s audit. 4. easy b A(n) _____ failure occurs when an auditor issues an erroneous opinion as the result of an underlying failure to comply with auditing standards. a. business b. audit c. audit risk d. process 5. easy a The standard of due care to which the auditor is expected to adhere is referred to as the: a. prudent person concept. b. common law doctrine. c. due care concept. d. vigilant person concept. 6. easy c Auditors may be liable to their clients for: a. punitive damages. b. compensatory damages. b. both a and b. c. neither a nor b. 7. easy b Under the laws of agency, partners of a CPA firm may be liable for the work of others on whom they rely. This would not include: a. employees of the CPA firm. b. employees of the audit client. c. other CPA firms engaged to do part of the audit work. d. specialists employed by the CPA firm to provide technical advice on the audit. 5-1
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8. easy d “Absence of reasonable care that can be expected of a person in a set of circumstances” defines: a. pecuniary negligence. b. gross negligence. c. extreme negligence. d. ordinary negligence. 9. easy c An example of a breach of contract would likely include: a. an auditor’s refusal to return the client’s general ledger book until the client paid last year’s audit fees. b. a bank’s claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan. c. a CPA firm’s failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative. d. none of the above. 10. easy c Privity of contract exists between: a. auditor and the federal government. b. auditor and third parties. c. auditor and client. d. all of the above. 11. easy b Audit contracts (engagement letters): a. may be either oral or written. b. must be written. c. must be written and notarized. d. must be written if the client is regulated by the Securities and Exchange Commission. 12. easy d An individual who is not party to the contract between a CPA and the client, but who is known by both and is intended to receive certain benefits from the contract is known as: a. a third party. b.
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