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Pitt Community College ACC 269 Chapter 4-Homework 1)Which of the following is not an incentive to pursue litigation against audit firms? a

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Pitt Community College

ACC 269

Chapter 4-Homework

1)Which of the following is not an incentive to pursue litigation against audit firms? a. Audit firm clients will get very little money from a suit due to high lawyer fees.

b.            Class action suits and associated user awareness of the possibilities and rewards of litigation.

c.             Contingent-fee-based compensation for law firms, especially in class action suits.

d.            A misunderstanding (expectations gap) by some users that an unqualified audit opinion represents an insurance policy against investment losses.

 

2.            Which term is defined as "the failure to exercise reasonable care, thereby causing harm to another or to property"?

a.            Ordinary negligence.

b.            Gross negligence.

c.             Breach of contract.

d.            Fraud.

 

3.            Which of the following statements is false?

a.            Statutory law is developed through legislation.

b.            Common law is developed through court decisions.

c.             Common law is responsible for the creation of the Sarbanes-Oxley Act of 2002.

d.            The SEC Act of 1933 is statutory law.

 

4.            In contract breach, one of the remedies is to grant an injunction to prohibit the auditor from performing certain acts (e.g., disclosing confidential information).

a.            True

b.            False

 

5.            All of the following are defenses that the auditor can use against a breach of contract suit except:

a.            The auditor did not have a duty to perform the service—not in the contract. b. The client provided the auditor with accurate documentation.

c. The auditor exercised due professional care in accordance with the contract.

d. The client's losses were not caused by the breach of contract.

 

6.            Which of the following is not a sanction available to the SEC when auditors found to be unqualified, unethical, or in willful violation of any provision of the federal securities laws can be disciplined by the SEC?

a.            Six months public service.

b.            Suspending individuals from serving as officers or directors of securities issuers or participating in the securities industry.

c.             Imposing civil monetary penalties.

d.            Requiring special continuing education of firm personnel.

 

7.            Which of the following statement is false?

a.            The Securities Act of 1933 shifts the burden of proof to the defendant, thus imposing a high standard of care for auditors and others associated with the preparation of a prospectus to be used by the client in issuing new securities.

b.            The primary purpose of the Securities Exchange Act of 1934, which is concerned with current, up-to-date financial information disseminated to the public, is to regulate the trading of securities following their initial issuance (the after-market).

c.             The primary purpose of the Securities Act of 1933, which deals with bringing new debt or equity issues to market, is to ensure that prospective investors are provided full and accurate information for making investment decisions.

d.            The SEC Act of 1934 requires filing annual reports within 30 to 60 days of year's end, besides communicating other significant events as they take place.

 

8.            All errors that auditors make in performing an audit are examples of ordinary negligence.

a.            True b. False

 

9.            When comparing an auditor's liability to third parties for negligence, which case approach do you think is best for the auditor?

a.            1965 Restatement of Tort, because the auditor is liable to foreseen third parties, which include unknown members of a known group of potential users for which the audited financial statements will be used for a specific economic action.

b.            Credit Alliance, because the auditor's liability is for negligence to identified users that the auditor has knowledge of (such as a loan receipt from the client to another user).

c.             Rosenblum, because the auditor is liable to forseeable users, which is the broadest interpretation of "classes of users."

d.            Ultramares, because the auditor is liable for negligence only to third parties who are the primary beneficiaries of the audit and named in the engagement letter.

 

10.          An audit client applied for a bank loan from First Bank. In connection with the loan application, the client engaged its auditor to audit its financial statements, and the auditor issued an unqualified opinion. Based on those statements, First Bank loaned money to the client. Shortly thereafter, the client filed for bankruptcy, and First Bank sued the auditor for damages. The audit documentation showed negligence and possible other misconduct in performing the audit. Which of these scenarios is not possible?

a.            The bank is an identified user if it can be shown that the auditor knew that the audit was done for the primary purpose of obtaining a loan from First Bank.

b.            If fraud is proven, First Bank would likely win the lawsuit.

c.             If First Bank can prove the auditor was reckless (or grossly negligence) in conducting the audit, a jury might find that the auditor's conduct was so gross that the auditor should be held liable to First Bank.

d.            All of these scenarios are possible.