ACTG 2P40 Study Guide - Equitable Remedy, Liquidated Damages, Rescission

Moore contracted in writing to sell her 2012 Hyundai Santa Fe to Hammer for $16,500. Moore agreed to deliver the car on Wednesday, and Hammer promised to pay the $16,500 on the following Friday. On Tuesday, Hammer informed Moore that he would not be buying the car after all. By Friday, Hammer had changed his mind again and tendered $16,500 to Moore. Moore, although she had not sold the car to another party, refused the tender and refused to deliver. Hammer claimed that Moore had breached their contract. Moore contended that Hammer's repudiation released her from her duty to perform under the contract.

Before either party to the contract had a duty to perform, Hammer informed Moore that he would not be carrying out his contractual obligation. This is known as ________of the contract.

a. anticipatory repudiation

b. mutual rescission

c. specific performance

Anticipatory repudiation of the contract is considered a _______of the contract.

a. material breach

b. waiver of breach

c. mutual rescission

Because of the material breach, Moore would be_____ from the contract.

a. discharged

b. not discharged

Once Hammer repudiated the contract, Moore had which of the following options (in addition to the ability to suspend her own performance)?

1- _____________________

a. pursue a remedy for the breach

b. modify the written contract in her favor

2- _____________________

a. modify the written contract in her favor

b. wait for performance by Hammer

Moore, as the non-breaching party to the contract, may file suit:

a. when her interest vests.

b. when she is scheduled to perform under the contract.

c. immediately.

Could Moore have sold the vehicle to another individual after Hammer's repudiating of the contract and prior to Hammer's retraction?

a. Yes

b. No

Moore did not take any action between the time Hammer repudiated the contract on Tuesday and the time he retracted his repudiation on Friday. What are the consequences of Moore's inaction?
a. None, Moore is the non-breaching party and the contract is discharged.

b. None, Moore has discretion to discharge or reinstate the contract.

c. Moore is obligated under the terms of the original contract because of Hammer's retraction.

Would a court likely find for Moore or Hammer under these facts?

a. Moore

b. Hammer

((( What if the facts were different?)))

Assume that on Wednesday Moore provide a written notice to Hammer indicating that the repudiation was final and that Moore was seeking another buyer for the vehicle. Would a court find for Moore or Hammer under these facts?

a. Moore

b. Hammer

4–28. 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 auditors’ liability is least desirable from the CPA’s
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 CPAs’ 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 CPAs’ fee was not material.
(3) The CPAs were not competent to accept the engagement.
(4) The CPAs’ 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 “due diligence.”
(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 auditor’s responsibility to all information included in registration
statements.
(3) Defi ned the CPA’s 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 Tenants’ 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.