Test Bank Ethical Obligations and Decision Making in Accounting Text and Cases 4th Edition by Steven M Mintz Chair

Test Bank Ethical Obligations and Decision Making in Accounting Text and Cases 4th Edition by Steven M Mintz Chair

Chapter 06
Legal, Regulatory, and Professional Obligations of Auditors

Multiple Choice Questions

1. The key element that protects an auditor against common law liability is:

A. Adherence to generally accepted accounting principles (GAAP)

B. Adherence to generally accepted auditing standards (GAAS)

C. Compliance with threats and safeguards approach

D. Maintain confidentiality of client information

2. Which of the following is NOT one of the four stages in an audit-related dispute?

A. Events arise that create losses for the users of the financial statements

B. Losses are linked to material misstatements of financial statements

C. Legal process resolves the dispute

D. Auditors legal liability leads to financial settlement

3. Which of the following would normally be considered sufficient to demonstrate due care on the part of the auditor?

A. The auditor had its work reviewed by another audit firm

B. The auditor cites adherence to generally accepted auditing standards (GAAS)

C. No omissions or misstatements have been found in the client’s financial statements

D. The auditor signs a statement expressing its unmodified opinion as to the fairness of the financial statements

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:

A. Prudence

B. Scienter

C. Nonfeasance

D. Due Care

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:

A. Business law

B. Tort law

C. Common law

D. Statutory law

6. A privity relationship means that:

A. A party may be a user of the financial statements

B. A party may sue if fraud has taken place

C. A party’s financial liability is limited

D. A party has a contractual obligation

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:

A. Third parties that were “foreseeable” may sue for ordinary negligence

B. Third parties may sue if one of the parties in contractual privity allowed it to

C. Third parties may sue in the case of fraud or constructive fraud

D. Third parties who used the financial statements may sue

8. The Restatement (Second) of Torts Approach:

A. Expands an accountant’s legal liability to third parties identified by the client as intended recipients of work

B. Limits an accountant’s legal liability to only those parties with which it has a privity relationship

C. Limits an accountant’s legal liability to only those parties that have been named by the client

D. Expands an accountant’s legal liability to all possible users of the audited financial statements

9. The Rosenblum case ruling was of concern to the accounting profession because it implied that:

A. Full joint and several liability would be reinstated

B. All possible third party users of financial statements must be anticipated

C. The concept of contractual privity would no longer be important

D. Financial liability would occur when scienter was proven

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:

A. Knowledge by the accountant that the financial statements are to be used for a particular purpose

B. The intention of the third party to rely on those statements

C. Some action by the accountant linking him or her to the third party that provides evidence of the accountant’s understanding of intended reliance

D. The identity of the third party must be directly known to the auditor

11. The unique aspect of auditors’ legal liability in the Rosenblum v. Adler ruling is:

A. Auditors could be held liable for ordinary negligence to all reasonably foreseeable third parties

B. Auditors could be held liable for gross negligence to all reasonably foreseeable third parties

C. Auditors could be held liable for fraud to all reasonably foreseeable third parties

D. Auditors should be able to detect all deceit by management

12. In Tenants Corp. v. Max Rothenberg, the auditors were held legally liable for:

A. Ordinary negligence

B. Gross negligence

C. Deficient tax work

D. Write-up work