Chap004tb - Chapter 04 - Legal Liability of CPAs Chapter 04...

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Chapter 04 - Legal Liability of CPAs Chapter 04 Legal Liability of CPAs True / False Questions 1. Fraud is defined as failure to use reasonable care in the performance of services. True False 2. Most of the burden of affirmative proof is on the defendant under common law. True False 3. The Ultramares v. Touche case held that auditors could be held liable to any foreseen third party for ordinary negligence. True False 4. The Securities Exchange Act of 1934 offers recourse against the auditors to a far greater number of investors than does the Securities Act of 1933. True False 5. The precedent set by the Hochfelder v. Ernst case is generally believed to have increased auditors' legal liability. True False 6. The auditors can be held liable for negligence in audits of financial statements, but not in reviews of financial statements. True False 4-1
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Chapter 04 - Legal Liability of CPAs 7. The results of the Continental Vending Corporation case included the criminal prosecution of auditors for gross negligence. True False 8. Most charges made against auditors under common law are criminal. True False 9. The Securities Act of 1934 includes provisions for criminal charges against persons violating the Act. True False 10. The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors. True False Multiple Choice Questions 11. A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A. The investor has not proven CPA negligence. B. The investor did not rely upon the financial statement. C. The CPA detected the misstatement after the audit report date. D. The misstatement is immaterial in the overall context of the financial statements. 4-2
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Chapter 04 - Legal Liability of CPAs 12. Which of the following is a correct statement related to CPA legal liability under common law? A. CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed. C. CPAs may escape all personal liability through incorporation as a limited liability corporation. D. CPAs are guilty until they prove that they performed the audit with "good faith." 13. Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for: A. Lack of due diligence.
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This note was uploaded on 01/10/2012 for the course ACC 435A taught by Professor Hathcock during the Winter '11 term at National.

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Chap004tb - Chapter 04 - Legal Liability of CPAs Chapter 04...

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