Kayla Harbaugh
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Auditing chapter 4 homework

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Kayla Harbaugh
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Auditing chapter 4 homework

Question 1 of 20

1

Which of the following is not an incentive for filing lawsuits against audit firms?

Select one of the following:

  • Increased complexity of accounting standards

  • Class action lawsuits

  • Joint and several liability doctrine

  • Contingent-fee-based compensation for law firms

Explanation

Question 2 of 20

1

Which of the following statements regarding liability doctrines is not true?

Select one of the following:

  • Joint and several liability provides more protection to users who experience losses from relying on misstated financial statements.

  • Under proportionate liability, a defendant’s share of damages depends on the degree of fault determined by the judge or jury.

  • Proportionate liability generally applies to lawsuits filed in federal court.

  • Joint and several liability cannot be applied in class-action lawsuits.

Explanation

Question 3 of 20

1

Which of the following has contributed to a decrease in federal class actions involving audit firms as co-defendants over the last decade?

Select one of the following:

  • Supreme Court decisions in Janus Capital Group, Inc., and Stoneridge Investment Partners.

  • Federal restrictions on contingent fees for lawyers in lawsuits filed under the Securities Act of 1934.

  • A growing expectations gap causing investors to view audit reports as insurance against losses.

  • All of the above

Explanation

Question 4 of 20

1

Which of the following statements describes the expectations gap as it relates to audited financial statements?

Select one of the following:

  • Investors believe that an unqualified audit report guarantees that an investment in the audited company is risk-free.

  • Investors believe that an unqualified audit report is an insurance policy against losses from a risky investment.

  • Investors believe they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements.

  • All of the above

Explanation

Question 5 of 20

1

A jury has determined that Jason Pruitt, CPA, is 20% at fault for losses suffered by investors who relied on materially misstated financial statements. The jury found that Pruitt’s co-defendants, the client company and the company’s CEO, are each 40% at fault. The company is bankrupt, and only Pruitt and the CEO have adequate resources to pay damages. Under joint and several liability, what is the likely percentage of damages that Pruitt will pay?

Select one of the following:

  • 100% of damages

  • 20% plus a proportionate share of damages attributed to the company

  • 20%

  • 20% plus 50% of damages attributed to the company

Explanation

Question 6 of 20

1

Liability based on federal securities law is known as which type of law?

Select one of the following:

  • Statutory law

  • Contract law

  • Commercial law

  • Common law

Explanation

Question 7 of 20

1

Under common law, which of the following is a basis for litigation against an auditor for failure to meet professional standards and responsibilities?

Select one of the following:

  • Ordinary negligence

  • Gross negligence

  • Fraud

  • All of the above

Explanation

Question 8 of 20

1

Which is the best definition of scienter?

Select one of the following:

  • A wrongful state of mind when making a misrepresentation

  • A material omission of facts

  • Fraudulent conduct in the purchase of a security

  • A casual connection between a misstatement and a material loss

Explanation

Question 9 of 20

1

Generally, auditors can be sued for breach of contract by which of the following parties?

Select one of the following:

  • Shareholders

  • Third parties other than shareholders

  • Clients

  • All of the above

Explanation

Question 10 of 20

1

Which of the following is not a basis for a third-party lawsuit against an auditor?

Select one of the following:

  • Breach of contract

  • Gross negligence

  • Common law

  • Fraud

Explanation

Question 11 of 20

1

The concept of the third-party beneficiary test was established by which court case?

Select one of the following:

  • Credit Alliance Corp. v. Arthur Andersen & Co.

  • Ultramares Corp. v. Touche.

  • Citizens State Bank v. Time, Schmidt, & Co.

  • Rosenblum v. Adler

Explanation

Question 12 of 20

1

Which of the following may an auditor use as a defense under the Securities Act of 1933?

Select one of the following:

  • Contributory negligence

  • Scienter

  • Due care

  • Immaterial loss

Explanation

Question 13 of 20

1

Which of the following is not a potential cause for action against the auditor for breach of contract?

Select one of the following:

  • Withdrawing from an audit engagement due to unresolved disagreements with management

  • Violating client confidentiality

  • Failing to provide the audit report on time

  • Failing to discover a material error in the financial statements

Explanation

Question 14 of 20

1

Compliance with GAAP was an unsuccessful defense in which of the following court cases?

Select one of the following:

  • Ultramares Corp. v. Touche.

  • Ernst and Ernst v. Hochfelder.

  • Herzfeld v. Laventhol, Krekstein, Horwath & Horwath.

  • Credit Alliance v. Arthur Andersen & Co.

Explanation

Question 15 of 20

1

Which of the following would be the first form filed with the SEC describing a major change in corporate governance?

Select one of the following:

  • 10-K

  • 10-Q

  • 8-Q

  • 8-K

Explanation

Question 16 of 20

1

To win a lawsuit against an auditor, third parties generally have to prove which of the following?

Select one of the following:

  • The parties suffered a loss

  • A loss occurred due to reliance on misleading financial statements

  • The auditor knew, or should have known, financial statements were misleading

  • All of the above

Explanation

Question 17 of 20

1

Which of the following documents must be filed with the SEC under the Securities Act of 1933 before a company can issue new securities to the public?

Select one of the following:

  • Form 10-K

  • Form 10-Q

  • Prospectus

  • All of the above

Explanation

Question 18 of 20

1

An audit failure occurs when an audit firm issues an inaccurate audit opinion and fails to comply with auditing standards.

Select one of the following:

  • True
  • False

Explanation

Question 19 of 20

1

Class action lawsuits are designed to encourage multiple lawsuits arising from the same claim.

Select one of the following:

  • True
  • False

Explanation

Question 20 of 20

1

Claims against auditors based on the deep pocket theory are most likely to occur in courts where damages are based on proportionate liability.

Select one of the following:

  • True
  • False

Explanation

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