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1. One of the accountant's most important roles is to serve as an independent evaluator of the financial statements issued
by management to investors and creditors.
a.
True
b.
False
2. To verify transactions, accountants use two mirror-image processes: vouching and tracing. Tracing is a process where
the accountant begins with an item of original data and checks out all the activity that has occurred from beginning to end
to make sure it has been properly recorded throughout the bookkeeping process.
a.
True
b.
False
3. Generally accepted accounting principles (GAAP) are the rules for preparing financial statements.
a.
True
b.
False
4. Manuel, in conducting an audit, must rely most heavily on rules found in generally accepted accounting principles
(GAAP).
a.
True
b.
False
5. The accounting firm of Griggs, Macon, and Fiurre audits the financial records of Chasse, a public company. The
Sarbanes-Oxley Act prohibits the accounting firm from providing consulting services to Chasse on human resource
matters.
a.
True
b.
False
6. Accounting contracts can be either written or oral.
a.
True
b.
False
7. Teresa is suing her accountant for fraud. To win, Teresa must show that she justifiably relied on the accountant’s
fraudulent statement.
a.
True
b.
False
8. Under the amended Securities Exchange Act of 1934, accountants are liable jointly and severally whether or not they
knew they were violating the law.
a.
True
b.
False
9. BGH Accounting firm audited the financial statements that were included in E-prise's registration statement. The
financial statements overstated sales by 2000%. In conducting the audit, BGH did not comply with generally accepted
auditing standards (GAAS). Under Section 11 of the 1933 Act, BGH is liable for any material misstatement or omission in
the financial statements they prepared for E-prise.
a.
True
b.
False
10. An auditor for Ralco Accounting firm was auditing the financial statements of E-prise. The auditor suspected that E-
prise was engaged in illegal activity. Under Section 10A of the 1934 Act, the auditor is required to notify E-prise's board
of directors of the suspicions.
a.
True
b.
False
11. Ralco was preparing Heidi's tax return. In confidence, Heidi revealed some information to Ralco. Under the federal
accountant-client privilege, the information Heidi disclosed is protected from disclosure in a criminal action by the U.S.
government.
a.
True
b.
False
12. After completing an audit, the most unfavorable opinion an auditor can issue is a disclaimer of opinion.
a.
True
b.
False
13. Auditors cannot protect themselves from liability to third parties by issuing a qualified or an adverse opinion.
a.
True
b.
False
14. Halbeck, LLC was negligent in its audit of E-treme, Inc. Unbeknownst to Halbeck, E-treme used the financial
statements to secure a loan from Great State Bank. Under the Ultramares doctrine, Halbeck will be liable to Great State
Bank for its losses on the loan.
a.
True
b.
False
15. Halbeck, LLC was negligent in its audit of E-treme, Inc. Unbeknownst to Halbeck, E-treme used the financial
statements to secure a loan from Great State Bank. Under the foreseeable doctrine, Halbeck will be liable to Great State
Bank for its losses on the loan.
a.
True
b.
False
16. Which of the following opinions indicates that the company's financial statements fairly present its financial condition
according to GAAP?
a.
Qualified opinion
b.
Adverse opinion
c.
Disclaimer of opinion
d.
Unqualified opinion
17. An accountant is liable for fraud to
a.
only her client.
b.
only her client and any known user of her information.
c.
any foreseeable user of her work product who justifiably relied on it.
d.
any third party with the exception of investors or creditors.
18. Clint is auditing MegaCorp. In reviewing the sales ledger, Clint saw that MegaCorp had sold 3,000 disk drives to
CompSales, Inc. Clint reviewed the original invoice of this sale to ensure that the date, price, quantity, and customer's
name all match. He then verified each step along the paper trail until the disk drives left the warehouse. This illustrates
a.
tracing.
b.
vouching.
c.
following.
d.
monitoring.
19. In 2007, the Securities and Exchange Commission (SEC) began to allow foreign companies to use which of
the following for its reporting standards?
a.
SOX
b.
GAAP
c.
GAAS
d.
IFRS
20. John is auditing MegaCorp. He finds an accounts payable for 10,000 cases of ball bearings. He checks to make sure
the paper actually arrived and that the receiving department had signed and dated the invoice. He also checks the original
purchase order to make sure the purchase was properly authorized. This illustrates
a.
tracing.
b.
vouching.
c.
following.
d.
monitoring.
21. An engagement letter is a written contract
a.
between an accountant and client.
b.
in anticipation of marriage.
c.
between a corporation and the AICPA.
d.
intended to create a fiduciary duty of an accountant to his client.
22. Sally prepared financial statements for MegaCorp knowing that the company would be using her statements when
applying for a loan at Big Bank. It is discovered she was negligent in preparing the statements and Big Bank sued her.
Sally is liable under the
a.
Ultramares doctrine.
b.
foreseeable doctrine.
c.
Restatement doctrine.
d.
All the above.
23. Rick prepared financial statements for MegaCorp knowing that it was going to use his statements to apply for a loan
with Big Bank. When Big Bank turned MegaCorp down, it applied to Fourth Bank for a loan. MegaCorp presented the
statements prepared by Rick to Fourth Bank which gave the company a loan. It was discovered that Rick was negligent in
preparing the statements, and Fourth Bank sued Rick. Under which of the following tests is Rick liable?
a.
Ultramares doctrine
b.
Foreseeable doctrine
c.
Restatement doctrine
d.
Both the foreseeable doctrine and the Restatement doctrine
24. To prevail under Section 11 of the 1933 Securities Act, a plaintiff must prove
a.
the registration statement contained a material misstatement or omission; and the plaintiff lost money.
b.
the registration statement contained a material misstatement or omission; the auditor acted knowingly or
recklessly; and the plaintiff lost money.
c.
the registration statement contained a material misstatement or omission; the auditor intended to deceive; and
the plaintiff lost money.
d.
only that the registration statement contained a material misstatement or omission.
25. If a plaintiff is successful in proving that an auditor has violated Section 10(b) of the 1934 Securities Exchange Act,
the auditor has
a.
primary liability.
b.
secondary liability.
c.
contingent liability.
d.
rebuttable liability.
26. Adam claimed that N & A, its accounting firm, negligently prepared an audit. To hold the accounting firm liable,
which of the following elements must be established?
a.
Scienter or guilty knowledge
b.
A fiduciary relationship
c.
Failure to exercise due care
d.
An executed engagement letter
27. An auditor who determines a company is materially misstating certain items on its financial statements should issue
a.
an unqualified opinion.
b.
a qualified opinion.
c.
an adverse opinion.
d.
a disclaimer of opinion.
28. Great State Bank claimed that Wiles Accounting committed fraud in the preparation of an audit. To hold the
accounting firm liable, which of the following elements must be established?
a.
Knowledge or reckless disregard of the truth
b.
A fiduciary relationship
c.
Failure to exercise due care
d.
An executed engagement letter
29. Who owns and controls an accountant's working papers?
a.
The client, in practice
b.
The IRS
c.
The accountant, in theory and practice
d.
The client, in theory
30. GBH, an accounting firm, was hired to prepare financial statements for E-treme. GBH
a.
cannot show the working papers to E-treme unless there is a valid court order.
b.
cannot show the working papers to E-treme unless it obtains permission from the AICPA.
c.
can show the working papers to anyone that asks, since the accountant owns them.
d.
must allow E-treme access to the working papers.
31. GBH, an accounting firm, was hired to prepare financial statements for E-treme. Great State Bank has asked to see
GBH's working papers since it is thinking about extending a $4 million line of credit to E-treme. Which of the following
statements is correct?
a.
GBH can show the bank the working papers because Great State Bank has a proper purpose.
b.
GBH can show the bank the working papers because Great State Bank is a known third party.
c.
GBH cannot show the bank the working papers under any circumstances as they are not finalized.
d.
GBH cannot show the bank the working papers unless E-treme gives permission.
32. Criminal liability for accountants
a.
is not an option under securities law; there is only civil liability.
b.
is possible under the Securities Act of 1933, the 1934 Act, state securities laws, and the Internal Revenue
Code.
c.
may result in fines but not imprisonment from violation of the federal securities laws.
d.
will result from violation of the accountant-client privilege under federal law.
33. The IRS files criminal charges against Rich for evasion of federal taxes. Rich's accountant, Sonya, is summoned to
appear in court to testify against Rich. The state where the incident occurred recognizes an accountant-client privilege.
Does Sonya have to testify in federal court against her client?
a.
Yes.
b.
Yes, but only if she is granted immunity by her state.
c.
No, the federal court must recognize her state's accountant-client privilege.
d.
No, the federal accountant-client privilege will protect her from testifying.
34. In which of the following cases will the federal accountant-client privilege protect the information from being
disclosed?
a.
A criminal case
b.
A case involving the SEC
c.
A case concerning the preparation of tax returns
d.
A civil case involving the IRS
35. The Big Four accounting firms spend about what percentage of their revenue on litigation, including settlements and
insurance?
a.
Less than five percent
b.
Between 10 and 20 percent
c.
Between 25 and 35 percent
d.
Over 50 percent
36. The accounting firm of Gray & Co. did accounting work for both Regional Bank and Carter Electronics. Without
Carter’s knowledge or approval, Gray & Co. discussed Carter’s financial problems with Regional Bank. In this situation,
Gray & Co.
a.
breached a legal obligation to keep all client information confidential.
b.
breached a moral, but not a legal, obligation of confidentiality.
c.
did not breach any obligations to its clients.
d.
acted properly because it was protecting its client, Regional Bank, from possibly making an unwise loan to
Carter Electronics.
37. Larry is a certified public accountant in a firm which audits public companies. Larry is accused of unethical conduct.
Is Larry required to abide by the ethical standards of the Public Company Accounting Oversight Board?
a.
Yes.
b.
He can be held liable only if he had actual knowledge of the particular guideline he is accused of violating.
c.
No, the PCAOB establishes audit rules, not ethical guidelines.
d.
No, the PCAOB has no authority over Larry.
38. John is a CPA in charge of auditing his client, McMillen & Co. John's duty of care to McMillen will most likely be
breached if John
a.
gives his client an oral report instead of a written report.
b.
gives his client incorrect advice based on an honest error in judgment.
c.
fails to give tax advice that would save his client money.
d.
fails to follow generally accepted auditing standards (GAAS).
39. Which of the following is NOT a provision of the Sarbanes-Oxley Act of 2002?
a.
Congress established the Public Company Accounting Oversight Board, which has the authority to regulate
public accounting firms, establishing audit rules and ethics guidelines.
b.
After five years with a client, the lead audit partner must rotate off the account for at least five years.
c.
Congress established the American Institute of Certified Public Accountants to develop ethical guidelines in a
Code of Professional Conduct.
d.
Auditors must communicate regularly and completely with audit committees of their clients and must describe
options the firm considers in preparing financial statements.
40. Discuss how SEC rules affect the legal and the ethical relationship between accountants and the companies they audit.
41. Discuss the advantages and disadvantages of using IFRS.
42. Fast Auditors prepared audited financial statements for Mega Company's registration statement in compliance with the
1933 Securities Act. John bought stock in Mega Company. It was discovered that the financial statements prepared for the
registration statement contained some important omissions. John sued Fast Auditors to recover his investment when Mega
Company turned out to be a bad investment. What must John prove to recover from Fast Auditors?
43. An auditor suspects its client is committing illegal acts that will have a material impact on its financial statements.
What is the auditor legally required to do and under what circumstances would the auditor directly notify the SEC?
44. Ron is an accountant who was contacted by Zebra Toy Company to prepare financial statements. Zebra Toy Company
told Ron that it wished to present these documents to Lion Wholesalers, Inc., a large supplier of toys. If Lion is convinced
that Zebra Toy Company is financially solid, it will issue Zebra a large line of credit.
After Ron prepares the financial documents, Zebra presents the information to Lion Wholesalers and also to Tiger Toy
Company, another wholesaler of toys. Zebra wishes to obtain a line of credit from Tiger as well as from Lion. If Ron
committed a serious error by overstating Zebra Toy Company's financial soundness and the two creditors, Lion and Tiger,
are damaged as a result, can these third parties recover damages from Ron? Explain.
45. Nancy is an auditor. She works in a state that uses the Ultramares Doctrine. She fraudulently prepared financial
documents for her client, Star, Inc. Her client presented the information to Moonglow, Inc. Moonglow was a potential
creditor of Star, Inc., and was seriously damaged by the fraudulent financial information. Moonglow sued Nancy. She
claims she is not liable to Moonglow, a third party, since she was not provided with its name at the time the audit was
prepared. Is she liable to Moonglow? Explain.
