ACC 411 Module 3 Homework

1-

Under common law, auditors are generally liable to the client for:

lack of due diligence.

ordinary negligence, but not gross negligence.

ordinary negligence or gross negligence.

gross negligence, but not ordinary negligence.

2-

Under the 1934 Securities Exchange Act auditors are liable to ordinary trade creditors for the:

lack of due diligence.

lack of good faith.

existence of gross negligence

existence of scienter.

3-

The Securities Exchange Act of 1934 applies to:

all companies under the jurisdiction of the Securities and Exchange Commission.

all companies within the United States with $10 million or more total assets and five or more shareholders.

all for–profit business corporations within the United States.

all companies within the United States with $1 million or more total assets.

4-

a.	If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for:

Strict liability for all damages incurred.

Gross negligence.

Either ordinary or gross negligence.

Breach of contract.

5-

b.	Which of the following approaches to auditors’ liability is least desirable from the CPA’s perspective?

The Ultramares approach.

The Rosenblum approach.

The Restatement of Torts approach.

The Foreseen User approach.

6-

c.	In cases of breach of contract, plaintiffs generally have to prove all of the following, except:

The CPAs had a duty.

The CPAs made a false statement.

The client incurred losses related to the CPAs’ performance.

The CPAs breached their duty.

7-

d.	If the CPAs provided negligent tax advice to a public company, the client would bring suit under:

The Securities Act of 1933.

The Securities Exchange Act of 1934.

The federal income tax law.

Common law.

8-

e.	Which of the following cases reaffirmed the principles in the Ultramares case?

Credit Alliance Corp. v. Arthur Andersen & Co.

Rosenblum v. Adler.

Ernst & Ernst v. Hochfelder.

Escott v. BarChris Construction Corporation.

9-

f.	Under common law, the CPAs who were negligent may mitigate some damages to a client by proving:

Contributory negligence.

The CPAs’ fee was not material.

The CPAs were not competent to accept the engagement.

The CPAs’ negligence was caused by the fact that they had too much work.

10-

g.	Under the Securities and Exchange Act of 1934, auditors and other defendants are faced with:

Joint liability.

Joint and several liability.

Proportionate liability.

Limited liability.

11-

h.

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?

The investor has not proved fraud or negligence by the CPA.

The investor did not actually rely upon the false statement.

The CPA detected the false statement after the audit date.

The false statement is immaterial in the overall context of the financial statements.

12-

i.	Which of the following elements is most frequently necessary to hold a CPA liable to a client?

Acted with scienter or guilty knowledge.

Was not independent of the client.

Failed to exercise due care.

Did not use an engagement letter.

13-

j.	Which statement best expresses the factors that purchasers of securities registered under the Securities Act of 1933 need to prove to recover losses from the auditors?
		The purchasers of securities must prove ordinary negligence by the auditors and reliance on the audited financial statements.

 

The purchasers of securities must prove that the financial statements were misleading and that they relied on them to purchase the securities.

The purchasers of securities must prove that the financial statements were misleading; then, the burden of proof is shifted to the auditors to show that the audit was performed with “due diligence.”

 

The purchasers of securities must prove that the financial statements were misleading and the auditors were negligent. 14- k. The most significant result of the Continental Vending case was that it: Created a more general awareness of the possibility of auditor criminal prosecution. Extended the auditor’s responsibility to all information included in registration statements. Defined the CPA’s responsibilities for unaudited financial statements. Established a precedent for auditors being held liable to third parties under common law for ordinary negligence.

15-

l.	The 1136 Tenants’ case was important because of its emphasis upon the legal liability of the CPA when associated with:

A review of annual statements.

Unaudited financial statements.

An audit resulting in a disclaimer of opinion.

Letters for underwriters.

16. 

The major reason auditors gather evidence is to:

assess control risk.

form an opinion on the financial statements.

evaluate management.

detect fraud.

 17

Evidence is generally considered sufficient when:

it has the qualities of being relevant, objective, and free from bias.

it is reliable.

there is enough of it to afford a reasonable basis for an opinion on the financial statements.

it has been obtained by random selection.

 18 

A principal purpose of a representation letter from management is to:

substitute for other evidence-gathering audit procedures.

remind management of its primary responsibility for the financial statements.

confirm management's approval of the work performed by the auditors.

serve as an introduction to company personnel and authorize the auditors to examine the records.

 19

a.	Which of the following is not a financial statement assertion made by management?

Existence of recorded assets and liabilities.

Completeness of recorded assets and liabilities.

Valuation of assets and liabilities.

Effectiveness of internal control.

 20

b.	Which of the following business characteristics is not indicative of high inherent risk?

Operating results that are highly sensitive to economic factors.

Large likely misstatements detected in prior audits.

Substantial turnover of management.

A large amount of assets.

 21

c.	As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter?

To increase the efficiency of the audit by eliminating the need for other audit procedures.

To remind the client's management of its primary responsibility for the financial statements.

To document in the audit working papers the client’s responses to certain verbal inquiries made by the auditors during the engagement.

To provide evidence in those areas dependent upon management’s future intentions.

 22.

d.	Which of the following statements best describes why auditors investigate related party transactions?

Related party transactions generally are illegal acts.

The substance of related party transactions may differ from their form.

All related party transactions must be eliminated as a step in preparing consolidated financial statements.

Related party transactions are a form of management fraud.

 23 

 

e.	Of the following, which is the least reliable type of audit evidence?

Confirmations mailed by outsiders to the auditors.

Correspondence between the auditors and suppliers.

Copies of sales invoices inspected by the auditors.

Canceled checks returned in the year-end bank statement directly to the client.

 24. 

f.	Analytical procedures are most likely to detect:

Weaknesses of a material nature in internal control.

Unusual transactions.

Noncompliance with prescribed control activities.

Improper separation of accounting and other financial duties.

 25.

g.	Which of the following is not a primary approach to auditing an accounting estimate?

Review and test management’s process for developing the estimate.

Review subsequent transactions.

Confirm the amounts.

Develop an independent estimate.

Auditors use three basic approaches for auditing accounting estimates—reviewing management’s process, reviewing subsequent transactions, and developing an independent estimate. Confirmation is not a basic approach for auditing most accounting estimates.

 26. 

h.	A primary purpose of the audit working papers is to:

Aid the auditors by providing a list of required procedures.

Provide a point of reference for future audit engagements.

Support the underlying concepts included in the preparation of the basic financial statements.

Support the auditors' opinion.

 27

i.	In what section of the audit working papers would a long-term lease agreement be filed?

Current working paper file.

Permanent working paper file.

Lead schedule file.

Corroborating documents file.

 28 

j.	Which of the following is not a function of audit working papers?

Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles.

Assist audit team members responsible for supervision in reviewing the work.

Assist auditors in planning future engagements.

Assist peer reviewers and inspectors in performing their roles.

 29 

k.	In using the work of a specialist, the auditors referred to the specialist’s findings in their report. This would be an appropriate reporting practice if the:

Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.

Auditors, as a result of the specialist’s findings, give a qualified opinion on the financial statements.

Client understands the auditors' corroborative use of the specialist’s findings in relation to the representations in the financial statements.

Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.

30 

l.

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably:

Remain silent on the matter since it is an internal matter of the auditing firm.

Note that the assistant auditor is completely dissociated from responsibility for the auditors’ opinion.

Document the additional work required, since all disagreements of this type will require expanded substantive procedures.

Document the assistant auditor’s position and how the difference of opinion was resolved.

31

e.	Loss sustained by a bank named as a third-party beneficiary in the engagement letter; suit brought under common law.

Liable

Not liable

32

f.	Loss sustained by a lender not in privity of contract; suit brought in a state court that adheres to the Rosenblum v. Adler precedent.

Not liable

Liable