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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 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
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