AYB301 Lecture Notes - Lecture 8: Competition And Consumer Act 2010, Crimes Act 1914, Contributory Negligence

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20 Jan 2017

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Auditors liable for negligence and/or breach of contract if fail to provide services or not exercise due care". The responsibility of auditors to safeguard the public"s interest has increased as: the number of investors has increased, the relationship between corporate managers and stockholders has become more impersonal, the government increasingly relies on accounting information. Auditor liability to clients and third party user groups developed from the following laws: contract law: liability from breach of contract. More demanding audit standards for detection of errors and fraud. User awareness of the possibilities and rewards of litigation. Deep pockets: auditors have professional indemnity insurance and have been jointly and severally liable. Increased audit complexity- computerised systems, new transactions and operations, more complicated accounting standards, more international business. Pressures to reduce audit time and improve audit efficiency. Misunderstanding by users that an unqualified opinion is an insurance policy against misstatements (expectations gap). Defendants combined into one legal action contingent-fee-based compensation.

Related Questions

4â28. Multiple Choice Questions
Select the best answer for each of the following questions and explain the reasons for your
choice.
a. If a CPA performs an audit recklessly, the CPA will be liable to third parties who were
unknown and not foreseeable to the CPA for:
(1) Strict liability for all damages incurred.
(2) Gross negligence.

(3) Either ordinary or gross negligence.
(4) Breach of contract.
b. Which of the following approaches to auditorsâ liability is least desirable from the CPAâs
perspective?
(1) The Ultramares approach.
(2) The Rosenblum approach.
(3) The Restatement of Torts approach.
(4) The Foreseen User approach.
c. In cases of breach of contract, plaintiffs generally have to prove all of the following,
except:
(1) The CPAs had a duty.
(2) The CPAs made a false statement.
(3) The client incurred losses related to the CPAsâ performance.
(4) The CPAs breached their duty.
d. If the CPAs provided negligent tax advice to a public company, the client would bring suit
under:
(1) The Securities Act of 1933.
(2) The Securities Exchange Act of 1934.
(3) The federal income tax law.
(4) Common law.
e. Which of the following cases reaffi rmed the principles in the Ultramares case?
(1) Credit Alliance Corp. v. Arthur Andersen & Co.
(2) Rosenblum v. Adler.
(3) Ernst & Ernst v. Hochfelder.
(4) Escott v. BarChris Construction Corporation.
f. Under common law, the CPAs who were negligent may mitigate some damages to a client
by proving:
(1) Contributory negligence.
(2) The CPAsâ fee was not material.
(3) The CPAs were not competent to accept the engagement.
(4) The CPAsâ negligence was caused by the fact that they had too much work.
g. Under the Securities and Exchange Act of 1934, auditors and other defendants are faced
with:
(1) Joint liability.
(2) Joint and several liability.
(3) Proportionate liability.
(4) Limited liability.
h. A CPA issued an unqualifi ed opinion on the fi nancial statements of a company that
sold common stock in a public offering subject to the Securities Act of 1933. Based on
a misstatement in the fi nancial statements, the CPA is being sued by an investor who
purchased shares of this public offering. Which of the following represents a viable
defense?
(1) The investor has not proved fraud or negligence by the CPA.
(2) The investor did not actually rely upon the false statement.
(3) The CPA detected the false statement after the audit date.
(4) The false statement is immaterial in the overall context of the fi nancial statements.
i. Which of the following elements is most frequently necessary to hold a CPA liable to a
client?
(1) Acted with scienter or guilty knowledge.
(2) Was not independent of the client.
(3) Failed to exercise due care.
(4) Did not use an engagement letter.

j. Which statement best expresses the factors that purchasers of securities registered under
the Securities Act of 1933 need to prove to recover losses from the auditors?
(1) The purchasers of securities must prove ordinary negligence by the auditors and reliance
on the audited fi nancial statements.
(2) The purchasers of securities must prove that the fi nancial statements were misleading
and that they relied on them to purchase the securities.
(3) The purchasers of securities must prove that the fi nancial statements were misleading;
then, the burden of proof is shifted to the auditors to show that the audit was
performed with âdue diligence.â
(4) The purchasers of securities must prove that the fi nancial statements were misleading
and the auditors were negligent.
k. The most signifi cant result of the Continental Vending case was that it:
(1) Created a more general awareness of the possibility of auditor criminal prosecution.
(2) Extended the auditorâs responsibility to all information included in registration
statements.
(3) Defi ned the CPAâs responsibilities for unaudited fi nancial statements.
(4) Established a precedent for auditors being held liable to third parties under common
law for ordinary negligence.
l. The 1136 Tenantsâ case was important because of its emphasis upon the legal liability of
the CPA when associated with:
(1) A review of annual statements.
(2) Unaudited fi nancial statements.
(3) An audit resulting in a disclaimer of opinion.
(4) Letters for underwriters.

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1. Fred, employee of ABC Company, notices the company has poorinternal controls and lack of segregation of duties. He realizes hecould take some cash and record it against miscellaneous expensewithout anyone catching it if he wanted. Which part of the fraudtriangle does Fred's thought relate to?

A. Opportunity

B. Rationalization

C. Pressure

D. None of the Above

2. Auditors must provide _______ assurance that the financialstatements are presented ________ in all material respects.

A. Reasonable; Fairly

B. Fairly; Reasonable

C. Complete; Justly

D. Justly; Complete

3. ____are items that management has full control over and isable to delay or eliminate.

A. Nondiscretionary accruals

B. Discretionary accruals

C. Defining Materiality

D. Revenue Recognition

4. ___Requires the auditor to perform professional services withdue care.

A. Legal Liability

B. Stat utory Law Liability

C. Common-Law Liability

D. Liability to Clients

5. Which is one of the UKs six principles on what constitutesadequate procedures?

A. Risk Assessment

B. Due diligence

C. Monitoring and Reporting

D. All of the Above

E. None of the above

6. The Fraud Triangle consists of:

Rationalization
Incentives & Pressures
Opportunities

D. All of the Above

7. A standard auditorâs report must include which of thefollowing:

What was audited
Management & auditorâs responsibilities
Scope of the audit
The auditorâs opinion
All of the Above

8. What does privity relationship mean?

A partyâs financial liability is limited
A party can sue if fraud has taken place
A party has a contractual obligation
A party may be a user of the financial statements

9. When an auditor acts careless in the application ofprofessional standards that it implies a reckless disregard for thestandards of due care is referred to as?

A. Negligence
B. Due Care
C. Fraud
D. Constructive Fraud

10. What is the legal term for the intent to deceive, manipulateor defraud?

A. Constructive Fraud
B. Due Care
C. Misfeasance
D. Scienter

11. From an accounting perspective, _____ implies a tendency todefer the recognition of assets and items that increase net incomewhile reserving for possible future declines in earnings:

A. High secrecy
B. High professionalism
C. High conservatism
D. High flexibility

12. According to CIMA code of ethics, âWhen you become sosympathetic to the interests of others as a result of a closerelationship that your professional judgment becomes compromisedâ,is considered:

A. Self-interest threat
B. Intimidation threat
C. Advocacy threat
D. Familiarity threat

13. To be appropriate audit evidence must be both:

A. Relevant and reliable
B. Significant and documented
C. Material and quantitative
D. Objective and reasonable

14. Common law liability does not include:

A. Breach of contract
B. Legislation passed a state or federal level
C. Tort actions
D. Legal opinions issued by judges

15. All of the following EXCEPT_______ is part of "The FraudTriangle"

A. Incentives/Pressures
B. Opportunity
C. Rationalization
D. All of the Above

16. A law suit against an accountant for failing to live up tothe terms of a contract is what type of legal liability?

Common-Law liability
Foreseeable Legal liability
Liability to Third Party
Liability to Clients

17. Audit Risk consist of 3 components:

Inherent, detection, material misstatement
Professional judgment, material misstatement, materialityjudgments
Inherent, detection, control

All the above

18. CIMAâs code identifies five common threats:

A. Integrity, Self-review, Objectivity, Intimidation,professional behavior

B. Integrity, self-review, self- interest, Intimidation,professional behavior

C. Self-review, self-interest, Intimidation, Familiarity,Advocacy

D. Integrity, Intimidation, Familiarity, self-interest,Advocacy

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AYB301 Lecture Notes - Lecture 8: Competition And Consumer Act 2010, Crimes Act 1914, Contributory Negligence

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