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Exam 4: Legal Liability of Cpas

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Question 21

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The Ultramares v. Touche case established that auditors could be held liable to any foreseen third party for ordinary negligence.

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Question 22

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Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence?

A) Ultramares v. Touche.
B) Restatement of Torts.
C) Rule 10b-5.
D) Rosenblum v. Adler.

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Question 23

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In which type of court case is proving "due diligence" essential to the auditors' defense?

Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence?

A case by a client against its CPA firm alleging negligence would be brought under:

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?

Under common law, when performing an audit, a CPA:

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.

A CPA's duty of due care to a client most likely will be breached when a CPA:

Fraud is defined as failure to use reasonable care in the performance of services.

Assume that a client has encountered a $500,000 fraud and that the CPA's percentage of responsibility established at 10%, while the company itself was responsible for the other 90%. Under which approach to liability is the CPA most likely to avoid liability entirely?

The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of: $\begin{array} { | c | c | c | } \hline & \begin{array} { c } \text { Registered Public } \\\text { Accounting Firms }\end{array} & \begin{array} { c } \text { Registered Public Accounting } \\\text { Firm Employees }\end{array} \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$

A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan, the CPA's best defense would be that the:

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?

A CPA firm has audited the financial statements included in a Form S-1 filed with the SEC under the Securities Act of 1933. Shortly thereafter, the company went bankrupt and a class action lawsuit was filed by the initial investors against the CPA firm. a. What should the plaintiff investors attempt to prove? b. Must the plaintiffs prove that they relied on the financial statements included in the Form S-1? c. What must the CPA firm prove in order to be successful with respect to the firm's defense? a. The plaintiff investors should attempt to prove: • That they sustained losses, and • That the financial statements were misleading. b. No. The investors need not prove reliance. c. The audit firm must prove:

The Securities Act of 1934 includes provisions for criminal charges against persons violating the Act.

Hark, CPA, negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements. Long's president told Hark that the audited financial statements would be submitted to several, at this point undetermined, banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will:

The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for:

The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be: