6-1
Chapter 06 Legal, Regulatory, and Professional Obligations of
Auditors Answer Key
Multiple Choice Questions
1.
The key element that protects an auditor against common law liability is:
2.
Which of the following is NOT one of the four stages in an audit-related dispute?
6-2
3.
Which of the following would normally be considered sufficient to demonstrate due care
on the part of the auditor?
6-3
4.
In the U.S., if the auditor can demonstrate having performed services with the same
degree of skill and judgment possessed by others in the profession, it can be said to have
exercised:
5.
The legal precedent that evolves from legal opinions issued by judges in deciding a case
and guides judges in deciding similar cases in the future is referred to as:
6-4
6.
A privity relationship means that:
7.
The Ultramares v. Touche case of 1933 held that a cause of action based on negligence
could not be maintained by a third party who was not in contractual privity; however, it did
leave open the possibility that:
6-5
8.
The Restatement (Second) of Torts Approach:
9.
The Rosenblum case ruling was of concern to the accounting profession because it
implied that:
6-6
10.
The Credit Alliance v. Arthur Andersen & Co. case established three tests that must be
satisfied for holding auditors liable for negligence to third parties. All of the following are
tests described except:
11.
The unique aspect of auditors’ legal liability in the Rosenblum v. Adler ruling is:
6-7
12.
In Tenants Corp. v. Max Rothenberg, the auditors were held legally liable for:
13.
When an auditor acts so carelessly in the application of professional standards that it
implies a reckless disregard for the standards of due care is referred to as:
6-8
14.
When courts find accountants liable for constructive fraud, the implication is that:
15.
Which of the following is NOT one of the defenses an auditor can use against third party
lawsuits for fraud?
6-9
16.
An audit engagement letter:
17.
Which of the following is NOT one of the most relevant sources of civil liabilities for
auditors charged with failing to adhere to the requirements of the laws in carrying out
professional obligations?
6-10
Learning Objective: 06-02 Explain the basis for auditors’ statutory legal liability.
Topic: Statutory Liability
18.
The Securities Act of 1933:
19.
In Grant Thornton v. Prospect High Income Fund, the Texas Supreme Court held:
Learning Objective: 06-02 Explain the basis for auditors’ statutory legal liability.
Topic: Statutory Liability
6-11
20.
In Grant Thornton v. Prospect High Income Fund, Grant used each of the following points
to defend itself against legal liability except:
21.
Under the Securities Act of 1933, accountants who assist in the preparation of the
registration statement are civilly liable if the registration statement:
6-12
22.
Under the Securities Act of 1933, if damages were incurred and there was a material
misstatement or omission in the financial statements, the CPA will most likely lose the
lawsuit unless:
23.
Which of the following is NOT a valid defense to legal liability under the Securities Act of
1933?
6-13
24.
The accounting issue(s) in the Crazy Eddie case were:
25.
In establishing that the third party relied on the financial statements, one factor that works
against plaintiffs’ establishing such reliance is:
6-14
26.
Under the Securities Act of 1933 and the Securities and Exchange Act of 1934,
accountants may be subject to criminal penalties for:
27.
The Securities and Exchange Act of 1934:
6-15
28.
Rule 10b-5 of the Securities Exchange Act of 1934 makes it unlawful for a CPA to engage
in each of the following activities except:
29.
Which of the following elements do NOT have to be proved once a plaintiff has established
the ability to sue under rule 10b–5?
6-16
30.
The U.S. Supreme Court ruled in Ernst & Ernst v. Hochfelder that:
6-17
31.
The executives of McKesson and Robbins Pharmaceuticals were able to steal about $2.9
million in 1939 because:
32.
In the case of Equity Funding, the audit client:
6-18
33.
Under the Private Securities Litigation Reform Act (PSLRA), if an auditor concludes that
an illegal act with a material effect on the financial statements has been reported to, but
not dealt with by senior management, the auditor should next report his/her conclusions
to:
34.
How long do management and the audit committee have to act if the independent auditor
reports possible illegal acts to them?
6-19
35.
The “particularity” provision in the PSLRA allows a plaintiff to:
36.
A “particularized” allegation requires establishing:
6-20
37.
The Private Securities Litigation Reform Act of 1995 applies the practice of ______ to
auditor liability determinations.
38.
What is a worrisome consequence under the joint and several liability principle?