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Auditing chapter 4 homework

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Auditing chapter 4 homework
Kayla Harbaugh
Quiz by Kayla Harbaugh, updated more than 1 year ago
Kayla Harbaugh
Created by Kayla Harbaugh about 4 years ago
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Question 1

Question
Which of the following is not an incentive for filing lawsuits against audit firms?
Answer
  • Increased complexity of accounting standards
  • Class action lawsuits
  • Joint and several liability doctrine
  • Contingent-fee-based compensation for law firms

Question 2

Question
Which of the following statements regarding liability doctrines is not true?
Answer
  • 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.

Question 3

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

Question 4

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

Question 5

Question
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?
Answer
  • 100% of damages
  • 20% plus a proportionate share of damages attributed to the company
  • 20%
  • 20% plus 50% of damages attributed to the company

Question 6

Question
Liability based on federal securities law is known as which type of law?
Answer
  • Statutory law
  • Contract law
  • Commercial law
  • Common law

Question 7

Question
Under common law, which of the following is a basis for litigation against an auditor for failure to meet professional standards and responsibilities?
Answer
  • Ordinary negligence
  • Gross negligence
  • Fraud
  • All of the above

Question 8

Question
Which is the best definition of scienter?
Answer
  • 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

Question 9

Question
Generally, auditors can be sued for breach of contract by which of the following parties?
Answer
  • Shareholders
  • Third parties other than shareholders
  • Clients
  • All of the above

Question 10

Question
Which of the following is not a basis for a third-party lawsuit against an auditor?
Answer
  • Breach of contract
  • Gross negligence
  • Common law
  • Fraud

Question 11

Question
The concept of the third-party beneficiary test was established by which court case?
Answer
  • Credit Alliance Corp. v. Arthur Andersen & Co.
  • Ultramares Corp. v. Touche.
  • Citizens State Bank v. Time, Schmidt, & Co.
  • Rosenblum v. Adler

Question 12

Question
Which of the following may an auditor use as a defense under the Securities Act of 1933?
Answer
  • Contributory negligence
  • Scienter
  • Due care
  • Immaterial loss

Question 13

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

Question 14

Question
Compliance with GAAP was an unsuccessful defense in which of the following court cases?
Answer
  • Ultramares Corp. v. Touche.
  • Ernst and Ernst v. Hochfelder.
  • Herzfeld v. Laventhol, Krekstein, Horwath & Horwath.
  • Credit Alliance v. Arthur Andersen & Co.

Question 15

Question
Which of the following would be the first form filed with the SEC describing a major change in corporate governance?
Answer
  • 10-K
  • 10-Q
  • 8-Q
  • 8-K

Question 16

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

Question 17

Question
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?
Answer
  • Form 10-K
  • Form 10-Q
  • Prospectus
  • All of the above

Question 18

Question
An audit failure occurs when an audit firm issues an inaccurate audit opinion and fails to comply with auditing standards.
Answer
  • True
  • False

Question 19

Question
Class action lawsuits are designed to encourage multiple lawsuits arising from the same claim.
Answer
  • True
  • False

Question 20

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