ACCY 131 Final - Ch 4

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emach532
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ACCY 131 Final - Ch 4
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2014-05-20 18:03:16
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ACCY 131 Chapter 4
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  1. What type of liability do CPAs have in the United States?

    a. Both common law and statutory law
    b. Only common law
    c. Only statutory law
    d. Neither common law nor statutory law
    • a. Both common law and statutory law
    •     (common: breach, neg, and fraud)
    •     (statutory: state or fed law broken)
  2. Ordinarily a claim of negligence against a CPA claims that the CPAs performed their duties:

    a. Without due professional care
    b. With reckless disregard of professional responsibilities
    c. With wanton disregard to GAAS
    d. With wanton disregard to GAAP
    • a. Without due professional care
    •     (tort law=neg or gross neg; not breach!)
    •     (neg=simple violation of duty to care)
    •     (gross neg=reckless disregard)
    •     (civil tort=wrongful act, injury or damage)
  3. Under which common law approach is an unidentified third party least likely to be able to recover damages from a CPA who is guilty of ordinary negligence?
    a. Due diligence approach
    b. Ultramares approach
    c. Restatement of Torts approach
    d. Rosenblum approach
    • a. Ultramares approach: known user
    •     (1931)
    •     (known users can sue CPA for neg only)
    •     (unknown can only sue for gross or fraud)
  4. Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party?
    a. Due diligence approach
    b. Ultramares approach
    c. Restatement of Torts approach
    d. Rosenblum approach
    • d. Rosenblum approach: foreseeable user
    •     (1938)
    •     (rejected Ultramares & Restate of Torts)
    •     (expands CPAs liability to unknown users)
    •     (only few states allow Rosenblum defense)
    •     (some courts allow banks or buyers to use)
  5. A CPA is considered 5% responsible for an investor's loss. Under which concept is it most likely that the CPA will be held liable for 100% of the damages if the other defendants are bankrupt?
    a. Common law liability
    b. Joint and several liability
    c. Proportionate liability
    d. Statutory liabillity
    • b. Joint and several liability
    •     (like proportionate but will be liable if the other party can't pay their share)
  6. Establishing "due diligence" is most directly related to court cases tried under:
    a. Common law by third parties
    b. Common law by clients
    c. 1933 Securities Act
    d. 1934 Securities Exchange Act
    • c. 1933 Securities Act
    •    (issuing co. must file & register with SEC)
    •    (both co. & its auditor can be sued)
    •    (protects initial stock buyers & 1st yr buyers)
    •    (only need to prove a loss & misled)
    •    (auditor needs to prove: due dil, not misstated, buyers knew, 3 yr expiration, joint & severable liability)
  7. A common stock investor's burden of proof relating to a CPA's deficiency of performance under the 1933 Securities Act, when compared to the 1934 Securities Exchange Act, is:
    a. Greater
    b. Less
    c. Equal
    d. Intermediate
    • b. Less
    •    (1934 Act must now file quarterly with SEC)
    •    (protects ALL buyers now)
    •    (but must prove they relied on stmts)
    •    (auditor now has "good faith" & "caused from other factors" defenses. Also has proportionate liability now up to 50% only if not fraud)
  8. Under common law rules, a claimant suing a CPA firm based on an audit of financial statements must prove each of the following except:
    a. A loss was sustained
    b. Reliance upon the audited financial statements was a proximate cause of the loss
    c. The loss sustained was material to the claimant
    d. The auditors were guilty of either ordinary or gross negligence, depending upon the claimant's recovery rights
    • c. The loss sustained was material to the claimant
    •   (3 approaches to CPA liability: Ultramares, Restate of Torts, & Rosenblum=ONLY A DEGREE OF NEGLIGENCE & A LOSS to prove each!)

    •   Restate of Torts approach: foreseen user
    •   (expanded Ultramares)
    •   (now "known" user is irrelevant to lawsuit)
    •   (foreseeable user can now sue for neg)
  9. The concept of privity may be important in defending auditors against potential claimants. Privity in general only allows:
    a. Clients to sue their auditors
    b. Lenders of the client to sue the auditor
    c. Anyone that relied upon the financial statements to make a decision to sue the auditor as long as the auditor knew, or should have known, about such reliance
    d. Shareholder who relied upon the audited financial statements to make an investment decision
    • a. Clients to sue their auditors
    •    (Privity approach=Ultramares approach)
    •    (known users can sue CPA for neg only)
    •    (unknown can only sue for gross or fraud)
  10. Which of the following is not correct concerning the Securities Act of 1933 and the Securities Exchange Act of 1934 with regard to auditor liability?
    a. The 1933 Act holds auditors to a higher standard of performance
    b. The 1934 Act provides protection to more third parties
    c. The 1933 Act relates to common law liability, while the 1934 Act relates to statutory law liability
    d. Only the 1934 Act is affected by the Private Securities Litigation Reform Act of 1955 provisions for proportionate liability under certain circumstances
    • c. The 1933 Act related to common law liability,while the 1934 Act relates to statutory law liability
    •    (common law varies by state & evolves)
    •    (statutory is constrained="Acts")

       (1995 Securities Litigation Reform Act=class action securities suits now, eliminated fraud suit under RICO, auditors must now report illegal acts to co. BoD & sometimes SEC; otherwise, collusion!)
  11. What are the primary sources of CPA liability from a client?
    • 1. Breach
    • 2. Negligence (Tort)
    •      a. Ordinary=slight disregard of due care
    •      b. Gross=reckless disregard of due care
    • 3. Fraud (can also be criminal by intent)
    •      a. Misrepresentation
    •      b. Constructive
    • 4. Statutory
    •      a. 1933 Securities Act
    •      b. 1934 Securities Exchange Act
  12. What are other sources of CPA liability from a client or even a 3rd party?
    • 1. Criminal statutes (client & 3rd party)
    •      a. "Act" violations
    •      b. Class actions
    • 2. RICO Act (Racketeering)
  13. What must be proved by a client in a civil negligence suit against a CPA?
    • 1. Duty (professional care)
    • 2. Breach 
    • 3. Loss
    • 4. Proximate cause (from CPA's performance)
  14. What approaches by 3rd parties are used in a civil negligence suit against a CPA?
    • 1. Ultramares: person was "known" user of statements
    • 2. Restate of Torts: person was "actually foreseeable" user
    • 3. Rosenblum: person was a "reasonably foreseeable" user (broader than Restate)
  15. What must be proved by a 3rd party or the defendant in a statutory suit against a CPA?
    • Under 1933 Securities Act:
    •      Plaint: misled=>loss
    •      Def: applied due diligence

    • Under 1934 Securities Exchange Act:
    •      Plaint: intent (scienter)=> misled=>  
    •                reliance=> loss
    •      Def: applied good faith
  16. What are the roles of the SEC and the PCAOB regarding CPAs?
    • SEC:
    •      1. Can stop CPA from issuing stmts
    •      2. Can restrict or fine CPA firms (a decree)
    •      3. Mandatory reporting by CPAs (illegal acts)

    • PCAOB:
    •      1. Conduct investigation & trial of CPA firms
    •      2. Impose sanctions: (fine, suspend, criminally accuse)
  17. What are unaudited financial statements of nonpublic companies?
    • 1. Compilation of financials:
    •      a. Based on provided info from client
    •      b. Not intended to be reliable

    • 2. Review of financials:
    •      a. Limited scope & verification applied
    •      b. Not intended to be reliable
  18. How can CPAs prevent litigation?
    • 1. Use engagement letters!
    • 2. Assess risk of bankruptcy
    • 3. Assess weakness of controls 
    • 4. Court-worthy working papers
    • 5. Follow up on fraud
    • 6. Malpractice insurance
    • 7. Obtain a lawyer quickly
  19. How can CPAs refute or minimize "causation" of damages?
    • Contributory negligence (few states only):
    •      a. Auditor's negligence was not sole cause
    •      b. Eliminates CPA's liability 

    • Comparative negligence (most states):
    •      a. Auditor's % at fault
    •      b. Allocated among defendants
    •      c. aka "proportionate liability"
  20. Do CPAs of unaudited financial statements have any legal liability?
    Yes, even to 3rd parties! If acting as accountants (due professional care!) rather than auditors.

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