Chapter 38 Accountants: Liability and Professional Responsibility 405

Practice Test

True/False Questions

Circle true or false:

1. T F Auditors are only liable under the 1933 Act if they intentionally misrepresent financial statements.

3. T F Accountants are prohibited under federal law from disclosing a client’s confidential information.

5. T F Under federal law, accounting firms may not provide any consulting services to companies that they audit.

Multiple-Choice Questions

7. An accountant is liable to a client for conducting an audit negligently if the accountant:

(a) Acted with intent.

(b) Was a fiduciary of the client.

(c) Failed to exercise due care.

(d) Executed an engagement letter.

9. To prove a case of fraud against an accountant, the following element is not required:

(a) The client lost money.

(b) The accountant made a false statement of fact.

(c) The accountant relied on the false statement.

(d) The accountant knew the statement was false.

(e) The accountant was reckless.

(e) Carter will lose because he had no contract with Ellen.

11. Ted prepared fraudulent financial statements for the Arbor Corp. Lacy read these statements before purchasing stock in the company. When Arbor goes bankrupt, Lacy sues Ted.

(a) Lacy will win because it was foreseeable that she would rely on these statements.

(b) Lacy will win because Ted was negligent.

(c) Lacy will lose because she did not rely on these statements.

(d) Lacy will lose because it was not foreseeable and she did not rely on these statements.

(e) Lacy will lose because it is not foreseeable that she would rely on these statements.

Short-Answer Questions

13. Deloitte was not liable because GAAS did not require it to disclose the flaws. Furthermore, the internal controls functioned adequately at the time of the audit. Monroe v. Hughes, 31 F.2d 772, 1994 U.S. App. LEXIS 18003 (9th Cir. 1994).

15. Although, in theory, the accountant owns the working papers, he may not disclose confidential client information without the client's permission. Ian Burrell and Adrian Levy, “Venables to Sue BBC Chief Over 'Stolen' Papers,” Sunday Times, July 16, 1995, Home News section.

17. ROLE REVERSAL: Prepare a multiple-choice question like those found on the CPA exam. The earlier question in the practice test provides an example.