Pitt Community College

ACC 269

Chapter 4 Moodle Quiz  Assignment #1:

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

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

3. Which of the following is not a reason that audit firms experience litigation for business failures, rather than audit failures?
   1. A misunderstanding by some users that an unqualified audit opinion represents an insurance policy against investment losses

B. CONTINGENT-FREE COMPENSATION FOR AUDIT FIRMS

c. Joint and several liability statutes

d. Class action lawsuits

4. 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 while 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 pay? a. 100%

b. None of these answers are correct.

c. 50%

d. 40%

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

TRUE

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

7. Which of the following statements is false?
   1. Fraud is an intentional concealment or misrepresentation of a material fact with the intent to deceive another person, causing damage to the deceived person.
   2. Negligence is the failure to exercise reasonable care, thereby causing harm to another person or property
   3. Gross negligence is operating with a reckless disregard for the truth, or the failure to use even minimal care.

D. BREACH OF CONTRACT OCCURS WHEN A PERSON COMPETENTLY PERFORMS A CONTRACTUAL DUTY.

8. An audit client can sue the auditor under contract law for which of the following?

A. ALL OF THESE ANSWERS ARE CORRECT

2. Breach of contract
3. Negligence
4. Gross negligence
5. Fraud

9. 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.

10. 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.

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

1. Granting an injunction prohibiting the auditor from doing certain acts, such as disclosing confidential information
2. Providing for recovery of amounts lost as a result of the breach
3. Requiring specific performance of the contract agreement

D. ALL OF THESE ANSWERS ARE CORRECT

12. Which of the following scenarios provides an example of a foreseen user?

A. THE AUDITOR KNOWS THAT THE CLIENT NEEDS AUDITED FINANCIAL STATEMENTS BECAUSE IT WANTS TO OBTAIN A LOAN FROM ONE OF SEVERAL POSSIBLE BANKS.

2. None of these choices are correct.
3. Current and prospective creditors and stockholders are likely to use the audited financial statements
4. The auditor knows that Wells-Fargo Bank wants audited financial statements as part of the client's application for a loan