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Exam 11: Liability of Accountants and Other Professionals

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Question 21

Multiple Choice

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Which of the following is true regarding states adhering to the privity or near-privity rule for third party liability of accountants?

A) All the states utilize it.
B) All states except one utilize it.
C) Three-quarters of the states utilize it.
D) One-half of the states utilize it.
E) Only a few states utilize it.

F) B) and C)
G) A) and E)

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Question 22

Multiple Choice

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[Accountant Dissatisfaction] Andrew agreed to perform accounting services for Dominique, and they entered into a contract setting forth the terms of their agreement. Dominique wanted Andrew to review her financial information and her system of internal controls. Dominique became dissatisfied with Andrew's work after he reported some irregularities in her financial statements. Andrew, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal. -The contract that Andrew and Dominique entered into setting the scope of Andrew's duties is referred to as a[n] ________.

A) Engagement letter
B) Accounting contractual letter
C) Auditing contractual letter
D) GAAP letter
E) GAAS letter

F) A) and D)
G) B) and E)

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Question 23

Multiple Choice

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About half of the states have adopted the ________ of accountant liability for negligence to third-parties.

[Travel Plans] Amina, a certified public accountant, is hired by Yuri to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from Bank ABC. Later, however, Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ. On the same day that she was hired by Yuri, Amina, who specializes in reviewing financial statements for companies seeking loans, was approached by Jonathan, who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Amina approved the statements, and he got a loan from Bank ABC. Additionally, Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle. Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy. Therefore, Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Amina approved the financial statements but, in fact, Maggie uses the approved statements to get a loan for $25,000 from Bank XYZ. During the time that she had set aside to audit and review the financial statements of Yuri, Jonathan, and Maggie, Amina was also preparing for an important trip. She was busy arranging transportation and accommodations for her stay. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Yuri, Jonathan, and Maggie ended up defaulting on the loans. The lenders sued Amina. -Under the Restatement test, referenced in the text's discussion of the case Bily v. Arthur Young & Co., which of the following is true regarding whether Bank XYZ can recover against Amina based upon the loan to Yuri?

[Carter's financials] Kayla works as an accountant. Rudy, an attorney, is working on a case for Carter, who is suing his business partner. Rudy does not have the time or the background to perform a complete analysis of Carter's financial statements, so Rudy asks Kayla to meet with Carter and assist Rudy with interpreting Carter's financial statements. Kayla meets with Carter, who provides a lengthy explanation of the financial statements and facts of the case. Afterwards, she prepares a memorandum for Rudy outlining her analysis of the financial issues of the case. Kayla runs into Carter at a baseball game several months later. Carter tells her that the stress is getting to him and he wants to move to Florida because he can no longer tolerate his business partner. A year later, at trial, Kayla is called as a witness by Carter's business partner to testify against Carter. No accountant-client privilege exists in Kayla's state, which is also where the trial takes place. -If Kayla is called to testify at trial, what is her best argument against revealing information about Carter's financial statements?

Which group established GAAS?

When hired to perform a task, the accountant enters into a contract called an engagement letter with the client that makes explicit and implicit promises, which, if not fulfilled, subject the accountant to liability.

Which of the following is false regarding the Private Securities Litigation Reform Act?

Which statement accurately describes the liability of accountants under the law of Canada?

Which of the following is false regarding compliance with GAAP and GAAS?

[BigCom Securities] A&Z and DCB, two large accounting firms, prepared registration statements for BigCom, a large, public company, and provided information on BigCom to the SEC. A&Z's statements contained several misrepresentations about BigCom's securities. Wallace, BigCom's Chairman of the Board of Directors, signed the statements prior to the SEC filing. As is the usual procedure, Wallace signed the statements but did not read them carefully. He heard there were some questionable issues about the quality of the statements, but he felt confident with the expertise of the large accounting firms. Subsequently, purchasers of BigCom claimed there were misrepresentations about BigCom's shares in the statements filed with the SEC and sued A&Z, DCB, and Wallace. All three defendants deny liability. -Belinda was hired as a security expert for a local accounting firm. She looks through the different policies and concludes that her new accounting firm needs a[n] ________ liability insurance policy to protect the company because they do business in the cloud.

If no, or insubstantial, accounting procedures were used in the compilation of the document, a financial statement is considered ________.

Under the Restatement test, regarding liability for negligence to third parties, an accountant is liable to known third-party users of the accountant's work product and also to those in the limited class whose reliance on the work the accountant specifically foresaw.

Many accountants and other professionals store confidential information on servers owned and maintained by a third party.

Which of the following is viewed as a middle ground test in regard to accounting liability to third-party users?

What must a plaintiff show in order to establish a violation of

Under the Sarbanes-Oxley Act of 2002, how long are accountants required to keep working papers?

[Carter's financials] Kayla works as an accountant. Rudy, an attorney, is working on a case for Carter, who is suing his business partner. Rudy does not have the time or the background to perform a complete analysis of Carter's financial statements, so Rudy asks Kayla to meet with Carter and assist Rudy with interpreting Carter's financial statements. Kayla meets with Carter, who provides a lengthy explanation of the financial statements and facts of the case. Afterwards, she prepares a memorandum for Rudy outlining her analysis of the financial issues of the case. Kayla runs into Carter at a baseball game several months later. Carter tells her that the stress is getting to him and he wants to move to Florida because he can no longer tolerate his business partner. A year later, at trial, Kayla is called as a witness by Carter's business partner to testify against Carter. No accountant-client privilege exists in Kayla's state, which is also where the trial takes place. -If Kayla is called to testify at trial, would she likely be required to reveal information about Carter's financial statements?

The ________ involves accountant liability to third parties based upon privity or near-privity.

When an accountant is found liable for fraud, what type of damages may be assessed in addition to compensatory damages in order to punish the accountant?