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40. What sort of liability does an accountant have under the Securities Exchange Act of 1934?
a. Civil liability where there is scienter
b. Criminal liability where there is a willful violation
c. Both of these are correct.
d. Neither of these is correct.
41. Which of the following is correct with regard to an accountant's contractual liability?
a. An accountant is bound to perform all the duties she explicitly agrees to perform
b. An accountant implicitly agrees to perform a contract in a competent and professional manner
c. An accountant who breaches his contract with a client may also be liable to a third party intended beneficiary
d. All of these are correct.
42. Anna has a contract to perform accounting services for Interior Corporation. She breaches her contract in a
nonmaterial way. Which of the following is correct with respect to Anna's right to be paid for her work?
a. Anna is not entitled to any compensation for her services.
b. Anna will be paid only if her contract does not specify that it is a "satisfaction" contract.
c. Anna is entitled to the contractually agreed upon fee less any damages or loss her breach has caused her
clients.
d. Anna is entitled to full compensation since the breach is nonmaterial.
43. Which of the following is correct with respect to an accountant's working papers?
a. The client is held to be the owner of an accountant's working papers.
b. An accountant must surrender his working papers to his client if the client so requests.
c. An accountant may not disclose the contents of his working papers unless the client consents or a court
orders the disclosure.
d. All of these are correct.
44. If an auditor of financial statements required by the 1934 Act becomes aware of an illegal act, the auditor must:
a. inform the issuer’s management and make sure the audit committee or the board of directors is adequately
informed.
b. notify the SEC within one day of discovering the illegal act.
c. resign if the issuer does not notify the SEC of the illegality within ten business days.
d. be subject to criminal penalties if the auditor willfully violates the Reform Act by not resigning or furnishing
reports to the SEC.
45. The Public Company Accounting Oversight Board can impose sanctions in its disciplinary proceedings, including:
a. revocation of an accounting firm’s registration, only on a temporary basis.
b. a permanent ban on a person’s associating with any registered firm.
c. monetary penalties of $1 million for natural persons.
d. monetary penalties of no more than $10 million for an accounting firm.
46. The Sarbanes-Oxley Act was enacted in response to:
a. accountants’ requests for definitive guidelines for their profession.
b. business scandals involving companies such as Enron, WorldCom, and the Arthur Andersen accounting firm.
c. the need to lighten the oversight and enforcement responsibilities of the SEC.
d. the Ultramares Corporation v. Touche case.
47. Tom decides to invest in the stock of Triad Television after he reads Edgar's audit, which includes a statement,
known by Edgar to be false, as to the value of numerous worthless securities held as corporate assets. If Tom sues
Edgar in a state using the broadest test for determining an accountant's liability for negligence to third parties, he will
be entitled to:
a. nothing, since he is an incidental beneficiary of the audit contract.
b. damages if he is a reasonably foreseeable plaintiff.
c. have Edgar complete a new audit.
d. rescission of his purchase contract.
48. An accountant can ethically disclose a client's confidential information if the accountant complies with:
a. the client's consent.
b. Generally Accepted Auditing Standards.
c. a court order.
d. All of these.
49. Pam certified a statement prepared by John, her employee, without checking John's work. He was never known to
be anything but diligent and his integrity had never been questioned. The audit contained gross misstatements. Pam
defends a suit against her claiming "due diligence." She will:
a. succeed, since she had no reason to believe her employee would lie.
b. succeed, because a reasonable person would not have inquired further.
c. fail, because due diligence requires reasonable investigation.
d. fail, because she is automatically liable for her employee's act.
50. Barbara works for Chevco but owns no Chevco stock. She buys 10 shares of a new issue of company stock as a
savings plan and afterward receives the signed registration statement, which contains an untrue statement of
material fact. Because she works for Chevco, she recognizes the error. Can she sue the auditor?
a. Yes, under Section 11, reliance is usually not required.
b. Yes, if she can prove she would not have bought the stock otherwise.
c. No, because she did not rely on the statement.
d. No, because there is no privity between Barbara and the auditor.
51. Sara holds 1,000 shares of stock in B B & B, Inc., which she purchased, based upon the financial statements that
Adam had prepared. She now realizes that the statements were false and wants to sue Adam for common law
fraud. What is Adam's best defense?
a. Sara lacks privity of contract.
b. Adam gave a broad disclaimer as part of the financial statement.
c. The false statements were immaterial.
d. B B & B contributed to the misstatement.
52. Baxsen, Inc. wanted to acquire the common stock of the Acme Corporation and hired Clark to audit the financial
statements of Acme. Clark failed to discover a large embezzlement by Acme's chief financial officer. In a common
law action by Baxsen against Clark, Baxsen must at a minimum prove:
a. ordinary negligence on Clark's part.
b. gross negligence on Clark's part.
c. fraud on Clark's part.
d. scienter on Clark's part.
53. The accountant-client privilege is recognized:
a. only in federal court proceedings.
b. by virtue of the common law in most states.
c. only in those states that have enacted statutes creating such a privilege.
d. in most states by reason of court decisions.
54. Which of the following would NOT constitute scienter contributing to liability under Rule 10b-5?
a. Negligent conduct
b. Intentional conduct
c. Reckless disregard for truth
d. Knowing conduct
55. Accountants would be subject to criminal liability where they:
a. negligently perform an audit.
b. willfully omit a material fact on a securities registration statement.
c. refuse to turn over working papers to a client.
d. willfully breach a contract.
56. An accountant's legal responsibility under state law may be based upon:
a. contract law.
b. tort law.
c. criminal law.
d. all of these.
57. Under the Private Securities Litigation Reform Act of 1995, those who audit financial statements required by the
1934 Securities Exchange Act must establish procedures capable of:
a. detecting material illegal acts.
b. identifying material related to party transactions.
c. evaluating whether there is a substantial doubt about the issuer's ability to continue as a going concern during
the next fiscal year.
d. All of these.
58. Audit working papers would include all but:
a. accountant fees accrued for the year from all accounts.
b. information disclosed during the audit.
c. conclusions reached.
d. records of accounting and auditing procedures and tests performed.
59. Wurst & Wurst is the accounting firm that has been used by the Intercontinental Bank for over twenty years. Ben
approached Alfred, a Wurst partner, at a cocktail party. Ben asked about the Bank's stability. Although Alfred knew
that the bank's stock was overvalued because of some loans to third world countries, he felt a considerable amount
of loyalty to the bank for being a good customer of his accounting firm. Alfred told Ben that Wurst had just finished
an audit of the bank, and that the bank was as sound as the Rock of Gibraltar. The next day Ben bought 1,000
shares of Intercontinental. One month later, the bank's losses became the subject of a major financial scandal. Ben is
angry and wants to sue. Does Ben have a case?
60. Henry prepared a registration for the first issuance of stock of the Winzell Corporation. Henry took the assignment
very seriously and spent a great deal of time preparing the statement. Two years after the statement was filed, the
SEC began to investigate the company and claims that the information in Henry's statement was misleading, because
some of the information given to him by the corporation was false. Henry had tried to verify the information, but was
not able to do so. An investor is now suing Henry claiming that he violated the 1933 act. Is Henry liable?
61. A group of investors bring a class action lawsuit against the H & R Accounting Firm under SEC Rule 10b-5 of the
1934 Securities Act. Richard, an accountant with the firm, had prepared financial reports filed with the SEC for the
Paymark Company. The reports contained false information of a material fact, and this led to financial loss to the
investors who relied on the reports. What is the likely result of the suit?
62. What are the requisite elements of fraud?
63. In providing services for his client, an accountant obtains information concerning the client's business affairs. What
are the legal issues concerning this client information?
64. What is the basis for an accountant's potential criminal liability in rendering professional services?
65. Identify three ways the Sarbanes-Oxley Act affects accountants and auditors.
