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Exam 11: Liability of Accountants and Other Professionals

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Question 1

Multiple Choice

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Which of the following established GAAP?

A) The American Institute of Certified Public Accountants
B) The American Institute of Auditors
C) The Financial Accounting Standards Board
D) The American Accounting and Auditing Standards Board
E) The Federal Accounting Standards Board

F) B) and E)
G) C) and E)

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C

Question 2

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"Wedding Plans." Selena, a certified public accountant, is hired by Bob to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from ABC Bank. Later, however, Bob changes his mind and uses the approved financial statements from Selena to get a loan for $100,000 from XYZ Bank. On the same day that she was hired by Bob, Selena, who specializes in reviewing financial statements for companies seeking loans, was approached by Carl who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Selena approved the statements, and he got a loan from ABC Bank. Additionally, Alice requested that Selena review her financial statements so that she could get a loan of $25,000 from a rich uncle. Selena is a bit uneasy about Alice because she believes that Alice is somewhat untrustworthy. Therefore, Selena requires that Alice agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Selena approved the financial statements but, in fact, Alice uses the approved statements to get a loan for $25,000 from XYZ Bank. During the time that she had set aside to audit and review the financial statements of Bob, Carl, and Alice, Selena was also preparing for her wedding. She was engaged in choosing menus, dress fittings, and parties. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Bob, Carl, and Alice ended up defaulting on the loans. The lenders sued Selena. -Under the Restatement Test, as discussed in the case in the text, Bily v. Arthur Young & Co., which of the following is true regarding the action brought by ABC Bank against Selena based upon the loss of funds on Carl's loan?

A) The bank will be able to recover because there was privity of contract.
B) The bank will be able to recover because no more than $10,000 was involved.
C) The bank will be able to recover because Selena was aware of how her work would be used even if she did not know the exact name of the bank involved.
D) The bank will not be able to recover because the identity of the bank was not known to Selena.
E) The bank will not be able to recover unless it can establish that it had dealt with Selena in the past.

F) All of the above
G) D) and E)

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Question 3

Multiple Choice

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What are the three primary types of liability assessed against accountants under common law?

Which of the following is fraud without fraudulent intent?

A plaintiff may only recover under Section 11 of the Securities Act of 1933 if the plaintiff can establish that the plaintiff purchased securities in an initial public offering.

Which of the following is true regarding what a plaintiff must do in order to recover damages under the Securities Act of 1933 after purchasing a security covered by a registration statement containing false information or missing information?

The contract entered into with a client when an accountant is hired to perform a task is referred to as a[n] ______________.

Which of the following are penalties under the Sarbanes-Oxley Act for the willful violation of the section requiring the retention of working papers?

In the instance of a breach of contract where the accountant, however, completed substantial performance, an accountant is entitled to which of the following?

Which of the following is viewed as a middle ground test in regard to accounting liability to third-party users?

A financial statement is considered ____________ if no, or insubstantial, accounting procedures were used in the compilation of the document.

"Prenuptial Agreement." Rhonda performed accounting services for Greg's used car business. She had a contract with Greg to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Greg's business, she developed various notes, calculations, memorandums, and other papers. Candace, Greg's fiancé, approached Rhonda to inquire about Greg's business. Candace and Rhonda had been friends for many years. Rhonda allowed Candace to look at the various notes, calculations, and other papers resulting from her review of Greg's financial statements and other records. Candace told Rhonda that she really needed to investigate Greg because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Rhonda agreed and proceeded to discuss Greg's finances with Candace revealing all the information that Greg had disclosed to her. Candace broke up with Greg telling him that after what she discovered from Rhonda, she was concerned that Greg could not support her in the way in which she wanted to become accustomed. Greg was very angry with Rhonda and told her that she was unethical and had violated the accountant-client privilege. -Assuming that Rhonda discussed with Candace confidential communications that she had with Greg, which of the following is true regarding the ethical nature of that communication?

An accountant who commits fraud is liable to those parties he or she reasonably should have foreseen would be injured through a justifiable reliance upon the fraudulent information.

When can an accountant be held liable to his or her client for fraud?

Which of the following are various documents used and developed during an audit and included notes, calculations, and memorandums?

For which of the following does the Securities Exchange Act impose liability?

Which of the following is true regarding the number of states that have adopted the Restatement Test of accountant liability for negligence to third-parties?

"Wedding Plans." Selena, a certified public accountant, is hired by Bob to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from ABC Bank. Later, however, Bob changes his mind and uses the approved financial statements from Selena to get a loan for $100,000 from XYZ Bank. On the same day that she was hired by Bob, Selena, who specializes in reviewing financial statements for companies seeking loans, was approached by Carl who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Selena approved the statements, and he got a loan from ABC Bank. Additionally, Alice requested that Selena review her financial statements so that she could get a loan of $25,000 from a rich uncle. Selena is a bit uneasy about Alice because she believes that Alice is somewhat untrustworthy. Therefore, Selena requires that Alice agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Selena approved the financial statements but, in fact, Alice uses the approved statements to get a loan for $25,000 from XYZ Bank. During the time that she had set aside to audit and review the financial statements of Bob, Carl, and Alice, Selena was also preparing for her wedding. She was engaged in choosing menus, dress fittings, and parties. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Bob, Carl, and Alice ended up defaulting on the loans. The lenders sued Selena. -Under the Restatement Test, as discussed in the case in the text, Bily v. Arthur Young & Co., which of the following is true regarding whether XYZ Bank can recover against Selena based upon the loan to Bob?

Which of the following was the result at the Supreme Court level in Matrixx Initiatives Inc., v. Siracusano, the case in the text in which the plaintiffs brought a class action alleging that the defendant violated security laws by failing to release reports that its product Zicam Cold Remedy had been found to result in a loss of smell?

Which of the following standards is used in applying the reasonably foreseeable users test regarding accountant liability to third-parties?