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1
Chapter 47
Professional Liability and
Accountability
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
B1. Professionals are required to deliver services but the competency of the
services is never an issue.
B2. Negligence cases against professionals usually focus on the element of
causation.
B3. Professionals are governed by the contracts they enter into with their clients.
B4. An accountant is not required to discover every impropriety, defalcation, and
fraud in a client’s books.
2 TEST BANK B—UNIT NINE: GOVERNMENT REGULATION
B5. In an opinion, an auditor can include a general statement disclaiming any
liability for false or misleading financial statements.
B6. Attorneys are required to find relevant law that is applicable to a case and can
be discovered through a reasonable amount of research.
B7. A client’s negligence is never a defense to a charge of negligence against an
accountant.
B8. An accountant can avoid liability by proving that his or her negligence was only
the proximate cause of the client’s loss.
B9. Under rules of professional misconduct, an attorney should not engage in
conduct involving deceit.
B10. Malpractice is professional negligence.
B11. A professional can not be liable for fraud if he or she did not act with fraudulent
intent.
CHAPTER 47: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 3
B12. Traditionally, a professional owed a duty only to those with whom the
professional had a direct contractual relationship.
B13. Working papers are the documents through which a court orders an accountant
to audit a public company.
B14. Under the Sarbanes-Oxley Act of 2002, accountants need not retain working
papers relating to an audit or review.
B15. A failure to follow generally accepted accounting principles and generally
accepted auditing standards is proof of a lack of due diligence.
B16. An accountant is not liable for an omission in a registration statement to a
purchaser of securities if the omission had no causal connection to the
purchaser’s loss.
B17. An accountant is always liable for a misleading statement that affects the price
of a security, even if the accountant acted in good faith.
B18. For a plaintiff to recover damages under Section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5, proof of intent is necessary.
4 TEST BANK B—UNIT NINE: GOVERNMENT REGULATION
B19. Penalties for aiding or assisting in the preparation of false tax returns are
limited to one penalty per taxpayer per tax year.
B20. An accountant’s liability under the Securities Act of 1933 requires privity of
contract with the purchaser of a security.
MULTIPLE CHOICE QUESTIONS
B1. Rochelle, an accountant, enters into a contract to provide services to Sky
Transport Inc. Rochelle does not finish the work within the contract’s deadline.
Sky Transport pays a penalty for the missed deadline and hires Turbo to
complete the job. Rochelle is most likely liable for
a. nothing.
b. Sky Transport’s penalty and the cost to hire Turbo.
c. Sky Transport’s penalty only.
d. the cost to hire Turbo only.
B2. Ricardo, an accountant, contracts to conduct an audit for Sensei Sushi
Restaurants. In performing the audit, Ricardo fails to detect certain misconduct.
Ricardo is most likely
a. liable if a normal audit would have revealed the misconduct.
b. liable if Ricardo issues a specifically qualified opinion.
c. not liable if Ricardo generally disclaims any liability.
d. not liable if the misconduct was due to Sensei Sushi’s negligence.
B3. Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing
defalcation. This is
a. embezzlement.
b. general misconduct.
CHAPTER 47: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 5
c. professional negligence.
d. misrepresentation of professional expertise.
B4. Norman is an accountant. Norman’s violation of generally accepted accounting
principles and generally accepted auditing standards
a. does not indicate that Norman was negligent.
b. is prima facie evidence that Norman was negligent.
c. precludes Norman from raising any defense against a negligence claim.
d. is embarrassing but will never subject Norman to liability.
B5. Delaney is an accountant charged with negligence by Estimation & Valuation
Services Inc., a client. Delaney may successfully defend against the claim if he
can show that
a. scienter was lacking.
b. he complied with all International Financial Reporting Standards.
c. the negligence was not the proximate cause of the client’s losses.
d. the negligence was only contributory.
B6. Edward, an attorney, allows a statute of limitations to lapse on a claim by
Fabrication Company, a client. Edward
a. can be held liable for malpractice.
b. has violated an ethical standard but cannot be held liable.
c. is subject to criminal penalties under the statute of limitations.
d. will be automatically disbarred.
B7. Ezra, an accountant, intentionally misstates a material fact to mislead Fruit
Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its
detriment. Ezra is most likely liable for
6 TEST BANK B—UNIT NINE: GOVERNMENT REGULATION
a. actual fraud.
b. constructive fraud.
c. destructive fraud.
d. virtual fraud.
B8. Commerce Bank files a suit against Drake, its former accountant, alleging
constructive fraud. Drake may be held liable
a. if Commerce Bank cannot prove actual fraud.
b. if Drake was grossly negligent in the performance of his duties.
c. only if Drake acted with fraudulent intent.
d. only if Drake impersonated someone who could be liable for fraud.
B9. Everett is an accountant whose clients include Finance & Capital, Inc. Under
the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he
could be liable to Finance & Capital and
a. any third party.
b. no third party.
c. third parties who are foreseen users of the work.
d. third parties who are reasonably foreseeable users of the work.
B10. Gift Basket Company’s liabilities exceed its assets. Gift Basket hires Hill &
Dale, an accounting firm, to prepare a balance sheet. Through Hill & Dale’s
negligent omissions, the sheet shows a net worth. Investment Bank relies on
the balance sheet to make a loan to Gift Basket. When Gift Basket defaults, the
bank files a suit against Hill & Dale. Under the Restatement rule, Hill & Dale is
most likely
a. liable because Hill & Dale owed a duty of care to Gift Basket.
b. liable because Hill & Dale owed a duty to any foreseeable user.
c. liable if Hill & Dale knew that the bank would rely on the balance sheet.
d. not liable because Hill & Dale and the bank were not in privity.
CHAPTER 47: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 7
B11. April is an accountant whose clients include Bistro Restaurants Inc. If April is
negligent in her work for Bistro, most courts would hold her liable to Bistro and
a. any third party.
b. no third party.
c. third parties who are foreseen users of the work.
d. third parties who are reasonably foreseeable users of the work.
B12. Craig is an accountant whose clients include Deep Excavation Corporation.
Elbert is Craig’s attorney. Under the common law and by statute in many
states, working papers that Craig develops when preparing financial reports for
Deep Excavation are owned by
a. Craig.
b. Deep Excavation.
c. Elbert.
d. no one—the papers must be destroyed immediately after use.
B13. Hadley, an accountant, accumulates working papers while performing an audit
for Ilene. After the audit, these documents belong to
a. Hadley, with Ilene having a right of access to the papers.
b. Ilene, with Hadley having a right of access to the papers.
c. neither Hadley nor Ilene—the papers must be disposed of.
d. the Public Company Accounting Oversight Board.
B14. Root & Branch is a Registered Public Accounting Firm. Root & Branch
performs auditing services for Sales & Service Company. Under the Sarbanes-
Oxley Act of 2002, at the same time, for the same company, Root & Branch
can also provide
a. bookkeeping and other services related to accounting records and
financial statements.
8 TEST BANK B—UNIT NINE: GOVERNMENT REGULATION
b. none of the choices.
c. appraisal and valuation services.
d. financial systems design and implementation.
B15. Odell, an accountant, prepares for Pronto Tacos Corporation a financial
statement that omits a material fact. The financial statement is included in
Pronto Tacos’s registration statement, which Qiana reads. Qiana buys Pronto
Tacos stock. Under Section 11 of the Securities Act of 1933, for Odell to be
liable for the omission, Qiana must show that she
a. relied on the omission.
b. suffered a loss on the stock.
c. knew about the omission before making her purchase.
d. is a sophisticated investor.
B16. Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount
Retail stock and loses money on the investment. To recover from Cathy under
Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5,
Efrem must prove
a. only the purchase and sale of a security.
b. fraud, reliance, materiality, and lack of knowledge about securities.
c. fraud, reliance, materiality, and incompetence.
d. fraud, reliance, materiality, causation, and scienter.
B17. Randi, an accountant, includes a false statement in a report for Social Media
Marketing, Inc., that is filed with the Securities and Exchange Commission.
When Theo buys stock in Social Media Marketing and loses money on the
investment, he files a suit against Randi, alleging fraud under the 1934
Securities Exchange Act. To avoid liability, Randi can show that she
a. intended to defraud Social Media Marketing, not Theo.
b. intended to profit on stock trades generally, not only Theo’s.
c. is an otherwise competent accountant.
d. was not aware her statement was false.
CHAPTER 47: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 9
B18. Reed prepares federal corporate income tax returns for Shopping Malls, Inc.,
and other firms. Under the Internal Revenue Code, with respect to an
understatement of a client’s tax liability, Reed may be liable for
a. negligent or willful misconduct.
b. no misconduct.
c. only negligent misconduct.
d. only willful misconduct.
B19. Beck is an accountant who prepares her clients’ tax returns. Cole is not an
accountant, but he also prepares tax returns for clients. Under the Internal
Revenue Code, liability for preparing a false return may be imposed on
a. Beck and Cole.
b. Beck only.
c. Cole only.
d. none of the choices.
B20. Diderot’s accountant is Esteban and his attorney is Figaro. All states protect, as
privileged information, Diderot’s communications with
a. Esteban and Figaro.
b. Esteban only.
c. Figaro only.
d. none of the choices.
ESSAY QUESTIONS
B1. Finola, a certified public accountant, provides accounting services to Global
Trade Corporation. The services include preparing Global Trade’s financial re-
ports and issuing opinion letters based on the reports. In 2014, Global Trade
falls into serious financial trouble, but neither Finola’s reports nor her opinion
10 TEST BANK B—UNIT NINE: GOVERNMENT REGULATION
letters indicate this situation. Relying on Finola’s portrayal of Global Trade’s
financial situation, the firm borrows a large sum of money to build a new ship-
ping facility. In lending Global Trade the money, Harbor City Bank relies on
Finola’s opinion letter. Finola is aware of this reliance. If Finola did not engage
in intentional fraud but was negligent, what is her potential liability?
B2. Miriam is an accountant. Natalie is an attorney. Which professional is most re-
stricted from disclosing her or his client’s communication?
CHAPTER 47: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 11
