Auditing Chapter 4

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True/False Questions

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

Answer: False Difficulty: Easy

2.Most of the burden of affirmative proof is on the defendant under common law.

Answer: False Difficulty: Medium

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

Answer: False Difficulty: Medium

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.

Answer: True Difficulty: Medium

5.The precedent set by the Hochfelder v. Ernst case is generally believed to have increased auditors' legal liability.

Answer: False Difficulty: Hard

6.The auditors can be held liable for negligence in audits of financial statements, but not in reviews of financial statements.

Answer: False Difficulty: Easy

7.The results of the Continental Vending Corporation case included the criminal prosecution of auditors for gross negligence.

Answer: True Difficulty: Medium

8.Most charges made against auditors under common law are criminal.

Answer: False Difficulty: Medium

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

Answer: True Difficulty: Medium

10.The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors.

Answer: False Difficulty: Medium

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.

Answer: D Difficulty: Hard

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.”

Answer: B Difficulty: Medium

13.Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for: A)Lack of due diligence.
B)Existence of scienter.
C)Ordinary negligence.
D)Auditors have no liability to security purchasers under this act.

Answer: B Difficulty: Hard

14.Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general Jones will have to prove that: A)He is not guilty of gross negligence.

B)He performed the audit with good faith.
C)He performed the audit with due diligence.
D)The plaintiffs did not show him to be negligent.

Answer: C Difficulty: Medium

15.An auditor knew that the purpose of her audit was to render...
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