Chapter 4 Pre Quiz

Question 1 of 10

1

Which of the following factors is not a reason that audit firms experience litigation for business failures, rather than audit failures?

Select one of the following:

Contingent-fee compensation for audit firms
Joint and several liability statutes
Class action lawsuits
A misunderstanding by some users that an unqualified audit opinion represents an insurance policy against investment losses.

Explanation

Question 2 of 10

1

The shareholders of a bank sue Karen Frank, CPA, for malpractice due to an audit failure that preceded the bank's financial failure. The jury determines that Frank is 60% at fault and that management is 40% at fault. The bank has no financial resources, nor does its management. Under joint and several liability, what is the likely percentage of damages that Frank will ensue?

Select one of the following:

100%
50%
40%
None of these.

Explanation

Question 3 of 10

1

Which of the following statements is false?

Select one of the following:

Negligence is the failure to exercise reasonable care, thereby causing harm to another person or to property.
Gross negligence is operating with a reckless disregard for the truth, or the failure to use even minimal care.
Fraud is an intentional concealment or misrepresentation of a material fact with the intent to deceive another person, causing damage to the deceived person.
Breach of contract occurs when a person competently performs a contractual duty.

Explanation

Question 4 of 10

1

The remedies for breach of contract include which of the following?

Select one of the following:

Requiring specific performance of the contract agreement.
Granting an injunction to prohibit the auditor from doing certain acts, such as disclosing confidential information.
Providing for recovery of amounts lost as a result of the breach.
All of these.

Explanation

Question 5 of 10

1

Litigation costs are the largest single cost faced by audit firms.

Select one of the following:

True
False

Explanation

Question 6 of 10

1

The expectations gap includes a misperception by shareholders that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements.

Select one of the following:

True
False

Explanation

Question 7 of 10

1

The three laws most relevant to auditor liability include common law, contract law, and statutory law.

Select one of the following:

True
False

Explanation

Question 8 of 10

1

Negligence occurs when a person fails to perform a contractual duty.

Select one of the following:

True
False

Explanation

Question 9 of 10

1

Examples of breach of contract include violating client confidentiality, failing to provide the audit report on time, and failing to discover material error or material employee fraud.

Select one of the following:

True
False

Explanation

Question 10 of 10

1

To win a claim against the auditor, third parties suing under common law must generally prove that they suffered a loss, that the loss was due to lack of reliance on misleading financial statements, and that the auditor knowingly participated in the financial misrepresentation.

Select one of the following:

True
False

	Created by Kayla Harbaugh about 4 years ago