Question 1

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

Accepted Answer

A)   actual fraud.
B)   constructive fraud.
C)   destructive fraud.
D)   virtual fraud.E) A) and D)
F) A) and C)

Question 2

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards

Accepted Answer

A)   does not indicate that Norman was negligent.
B)   is prima facie evidence that Norman was negligent.
C)   precludes Norman from raising any defense against a negligence claim.
D)   is embarrassing but will never subject Norman to liability.E) B) and D)
F) B) and C)

Question 3

Commerce Bank files a suit against Drake, its former accountant, al?leging constructive fraud. Drake may be held liable

Accepted Answer

A)   if Commerce Bank cannot prove actual fraud.
B)   if Drake was grossly negligent in the performance of his duties.
C)   only if Drake acted with fraudulent intent.
D)   only if Drake impersonated someone who could be liable for fraud.E) B) and C)
F) A) and D)

Question 4

Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year.

Accepted Answer

A) True 
 B)False

Question 5

A client's negligence is never a defense to a charge of negligence against an accountant.

Accepted Answer

A) True 
 B)False

Question 6

Under rules of professional misconduct, an attorney should not engage in conduct involving deceit.

Accepted Answer

A) True 
 B)False

Question 7

Odell, an accountant, prepares for Pronto Tacos Corporation a financial statement that omits a material fact. The financial statement is included in Pronto Tacos's registration statement, which Qiana reads. Qiana buys Pronto Tacos stock. Under Section 11 of the Securities Act of 1933, for Odell to be liable for the omission, Qiana must show that she

Accepted Answer

A)   relied on the omission.
B)   suffered a loss on the stock.
C)   knew about the omission before making her purchase.
D)   is a sophisticated investor.E) A) and B)
F) C) and D)

Question 8

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with

Accepted Answer

A)   Esteban and Figaro.
B)   Esteban only.
C)   Figaro only.
D)   none of the choices.E) A) and B)
F) A) and C) C

Question 9

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act of 2002, at the same time, for the same company, Root & Branch can also provide

Accepted Answer

A)   bookkeeping and other services related to accounting records and financial statements.
B)   none of the choices.
C)   appraisal and valuation services.
D)   financial systems design and implementation.E) B) and C)
F) C) and D)

Question 10

Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b)  of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove

Accepted Answer

A)   only the purchase and sale of a security.
B)   fraud, reliance, materiality, and lack of knowledge about securities.
C)   fraud, reliance, materiality, and incompetence.
D)   fraud, reliance, materiality, causation, and scienter.E) B) and C)
F) C) and D)

Question 11

Attorneys are required to find relevant law that is applicable to a case and can be discovered through a reasonable amount of research.

Accepted Answer

A) True 
 B)False

Question 12

Traditionally, a professional owed a duty only to those with whom the professional had a direct contractual relationship.

Accepted Answer

A) True 
 B)False

Question 13

An accountant's liability under the Securities Act of 1933 re?quires privity of contract with the purchaser of a security.

Accepted Answer

A) True 
 B)False

Question 14

Negligence cases against professionals usually focus on the element of causation.

Accepted Answer

A) True 
 B)False

Question 15

Ricardo, an accountant, contracts to conduct an audit for Sensei Sushi Restaurants. In performing the audit, Ricardo fails to detect certain misconduct. Ricardo is most likely

Accepted Answer

A)   liable if a normal audit would have revealed the misconduct.
B)   liable if Ricardo issues a specifically qualified opinion.
C)   not liable if Ricardo generally disclaims any liability.
D)   not liable if the misconduct was due to Sensei Sushi's negligence.E) B) and C)
F) C) and D)

Question 16

Reed prepares federal corporate income tax returns for Shopping Malls, Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for

Accepted Answer

A)   negligent or willful misconduct.
B)   no misconduct.
C)   only negligent misconduct.
D)   only willful misconduct.E) A) and B)
F) A) and C) A

Question 17

Edward, an attorney, allows a statute of limitations to lapse on a claim by Fabrication Company, a client. Edward

Accepted Answer

A)   can be held liable for malpractice.
B)   has violated an ethical standard but cannot be held liable.
C)   is subject to criminal penalties under the statute of limitations.
D)   will be automatically disbarred.E) A) and B)
F) A) and C)

Question 18

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and

Accepted Answer

A)   any third party.
B)   no third party.
C)   third parties who are foreseen users of the work.
D)   third parties who are reasonably foresee?able users of the work.E) A) and B)
F) A) and C)

Question 19

Delaney is an accountant charged with negli?gence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that

Accepted Answer

A)   scienter was lacking.
B)   he complied with all International Financial Reporting Standards.
C)   the negligence was not the proximate cause of the client's losses.
D)   the negligence was only contributory.E) B) and D)
F) C) and D)

Question 20

Finola, a certified public accountant, provides accounting serv?ices to Global Trade Corporation. The services include preparing Global Trade's financial re?ports and issuing opinion letters based on the reports. In 2014, Global Trade falls into serious financial trouble, but neither Finola's reports nor her opinion let?ters indicate this situation. Relying on Finola's portrayal of Global Trade's finan?cial situation, the firm borrows a large sum of money to build a new ship?ping facility. In lending Global Trade the money, Harbor City Bank relies on Finola's opinion letter. Finola is aware of this reliance. If Finola did not en?gage in intentional fraud but was negligent, what is her potential liability?

Accepted Answer

Regarding the accountant's potential liability to the bank, most courts would hold her liable for negligence, but the standard for im?posing this liability varies.
There are three different views. The tradi?tional rule (the Ultramares rule) states that accountants owe a duty of care only to those persons for whose primary benefit the accountant pre?pares reports or issues opinion letters. In the absence of privity, a party could not recover from an accoun?tant. Under that rule, the accountant in this problem would not be held liable to the bank.
Under a slight modification of this rule, some courts hold that if a third party has a suf?ficiently close relationship or nexus (link or connection) with an ac?count?ant, then the privity requirement may be satisfied without estab?lishing an accountant-client relation?ship. Under this modification, the accountant would be held liable because he knew that the bank relied on her letter.
The majority of courts have adopted the position taken by Section 552 of the Restatement (Second) of Torts, under which an ac?countant's liability ex?tends to persons for whose benefit the accountant "intends to supply the information or knows that the re?cipient intends to supply it" and to those persons whom the accountant "intends the in?formation to influence or knows that the recipient so intends." Under this rule, the ac?countant will be held liable to the bank for negligent misstatements or omissions, be?cause he knew that the bank was relying on her work product when de?cid?ing whether to make the loan.
A few other courts hold accountants li?able to any users whose reliance on an ac?countant's statements or reports is reasonably foreseeable. Of course, under this stan?dard the accountant in the hypothetical would clearly be held liable.

Exam 47: Professional Liability and Accountability

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

Correct Answer
verified

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards

Correct Answer
verified

Commerce Bank files a suit against Drake, its former accountant, al?leging constructive fraud. Drake may be held liable

Correct Answer
verified

Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year.

Correct Answer
verified

A client's negligence is never a defense to a charge of negligence against an accountant.

Correct Answer
verified

Under rules of professional misconduct, an attorney should not engage in conduct involving deceit.

Correct Answer
verified

Correct Answer
verified

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with

Correct Answer
verified
C

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act of 2002, at the same time, for the same company, Root & Branch can also provide

Correct Answer
verified

Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove

Correct Answer
verified

Attorneys are required to find relevant law that is applicable to a case and can be discovered through a reasonable amount of research.

Correct Answer
verified

Traditionally, a professional owed a duty only to those with whom the professional had a direct contractual relationship.

Correct Answer
verified

An accountant's liability under the Securities Act of 1933 re?quires privity of contract with the purchaser of a security.

Correct Answer
verified

Negligence cases against professionals usually focus on the element of causation.

Correct Answer
verified

Ricardo, an accountant, contracts to conduct an audit for Sensei Sushi Restaurants. In performing the audit, Ricardo fails to detect certain misconduct. Ricardo is most likely

Correct Answer
verified

Reed prepares federal corporate income tax returns for Shopping Malls, Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for

Correct Answer
verified
A

Edward, an attorney, allows a statute of limitations to lapse on a claim by Fabrication Company, a client. Edward

Correct Answer
verified

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and

Correct Answer
verified

Delaney is an accountant charged with negli?gence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that

Correct Answer
verified

Exam 47: Professional Liability and Accountability

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for

Correct AnswerverifiedShow Answer

Norman is an accountant. Norman's violation of generally accepted accounting principles and generally accepted auditing standards

Correct AnswerverifiedShow Answer

Commerce Bank files a suit against Drake, its former accountant, al?leging constructive fraud. Drake may be held liable

Correct AnswerverifiedShow Answer

Penalties for aiding or assisting in the preparation of false tax returns are limited to one penalty per taxpayer per tax year.

Correct AnswerverifiedShow Answer

A client's negligence is never a defense to a charge of negligence against an accountant.

Correct AnswerverifiedShow Answer

Under rules of professional misconduct, an attorney should not engage in conduct involving deceit.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with

Correct AnswerverifiedC

Root & Branch is a Registered Public Accounting Firm. Root & Branch performs auditing services for Sales & Service Company. Under the Sarbanes-Oxley Act of 2002, at the same time, for the same company, Root & Branch can also provide

Correct AnswerverifiedShow Answer

Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove

Correct AnswerverifiedShow Answer

Attorneys are required to find relevant law that is applicable to a case and can be discovered through a reasonable amount of research.

Correct AnswerverifiedShow Answer

Traditionally, a professional owed a duty only to those with whom the professional had a direct contractual relationship.

Correct AnswerverifiedShow Answer

An accountant's liability under the Securities Act of 1933 re?quires privity of contract with the purchaser of a security.

Correct AnswerverifiedShow Answer

Negligence cases against professionals usually focus on the element of causation.

Correct AnswerverifiedShow Answer

Ricardo, an accountant, contracts to conduct an audit for Sensei Sushi Restaurants. In performing the audit, Ricardo fails to detect certain misconduct. Ricardo is most likely

Correct AnswerverifiedShow Answer

Reed prepares federal corporate income tax returns for Shopping Malls, Inc., and other firms. Under the Internal Revenue Code, with respect to an understatement of a client's tax liability, Reed may be liable for

Correct AnswerverifiedA

Edward, an attorney, allows a statute of limitations to lapse on a claim by Fabrication Company, a client. Edward

Correct AnswerverifiedShow Answer

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and

Correct AnswerverifiedShow Answer

Delaney is an accountant charged with negli?gence by Estimation & Valuation Services Inc., a client. Delaney may successfully defend against the claim if he can show that

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified