优质Auditingtestbankchapter5

1、Auditing and Assurance Services, 1(5Aerens)Chapter 5 Legal LiabilityLearning Objective 5-11) Discuss three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs.Answer: Major factors include:? The growing awareness

2、of the responsibilities of public accountants by users of financial statements.? An increased consciousness on the part of the Securities and Exchange Commission regarding its responsibility for protecting investors interests.? The complexity of auditing and accounting functions caused by the increa

3、sing size of businesses, the globalization of business, and the complexities of business operations.? Large civil court judgments against CPA firms.? The tendency of society to accept lawsuits by injured parties against anyone who might be able to provide compensation, regardless of who was at fault

4、, coupled with joint and several liability doctrine.? The willingness of CPA firms to settle legal problems out of court to avoid costly legal fees and adverse publicity, rather than pursuing resolution through the judicial process.? The difficulty judges and jurors have understanding and interpreti

5、ng technical accounting and auditing matters.? The global recession and tough economic times result in business failures, which prompt stakeholders to seek restitution from others, including external auditors.Terms: Major factors that have contributed to the recent increase in the number of lawsuits

6、 against auditorsDiff: Moderate Objective: LO 5-1AACSB: Reflective thinking skillsLearning Objective 5-21) A(n) failure occurs when an auditor issues an erroneous opinion because it failed tocomply with requirements of auditing standards.A) businessB) auditC) ethicsD) process Answer: B Terms: Failur

7、e which occurs when an auditor issues an erroneous opinion Diff: EasyObjective: LO 5-2 AACSB: Reflective thinking skills12) The expectation gap:A) exists between the auditor and the SEC.B) exists because auditors guarantee the accuracy of the financial statements.C) often results in unwarranted laws

8、uits against the auditor.D) is a legal concept supported by the federal courts.Answer: CTerms: Expectation gapDiff: ModerateObjective: LO 5-2AACSB: Reflective thinking skills3) Distinguish between what is meant by business failure and audit failure.Answer: Business failure occurs when a business is

9、unable to repay its lenders or meet expectations of its investors because of economic or business conditions, such as recession, poor management decisions, or unexpected competition in the industry. Audit failure occurs when the auditor issues an incorrect audit opinion because it failed to comply w

10、ith the requirements of auditing standards.Terms: Business failure and audit failureDiff: EasyObjective: LO 5-2AACSB: Reflective thinking skills4) Audit risk is the risk there will be an audit failure for a given audit engagement.A) TrueB) FalseAnswer: BTerms: Audit riskDiff: ModerateObjective: LO 5

11、-2AACSB: Reflective thinking skills5) The term audit failure refers to the situation when the auditor has followed auditing standards yet still fails to discover that the clients financial statements are materially misstated.A) TrueB) FalseAnswer: BTerms: Audit failure; Followed audit standards and

12、fail to discover material misstatementDiff: ModerateObjective: LO 5-2AACSB: Reflective thinking skills2Learning Objective 5-31) In the performance of an audit, a CPA:A) is legally liable for detecting an immaterial client fraud.B) must strictly follow GAAP for privately held clients.C) must exercise

13、 constructive professional care in the performance of their audit responsibilities.D) must exercise due professional care in the performance of their audit responsibilities. Answer: DTerms: Performance of an auditDiff: EasyObjective: LO 5-3AACSB: Reflective thinking skills2) If an auditor fails to f

14、ulfill a certain requirement in the contract, they may be guilty of:A) contract fraud.B) breach of contract.C) constructive fraud.D) criminal neglect. Answer: BTerms: Liability when auditors fail to exercise due careDiff: EasyObjective: LO 5-3AACSB: Reflective thinking skills3) Recklessness in the c

15、ase of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intent to deceive financial statement users. This description is the legal term for:A) ordinary negligence.B) gross negligence.C) constructive fraud.D) fraud. Answer: C

16、 Terms: Legal term for reckless in an audit with not intent to deceive Diff: EasyObjective: LO 5-3AACSB: Reflective thinking skills34) The standard of due care to which the auditor is expected to adhere to in the performanee of the audit is referred to as the:A) prude nt pers on con cept.B) com mon

17、law doctri ne.C) con structive care con cept.D) vigila nt pers on con cept.An swer: ATerms: Sta ndard of due careDiff: ModerateObjective: LO 5-3AACSB: Reflective thi nking skills5) Auditors may be liable to their clie nts if they are found guilty of:A)Ordi nary n eglige neeGross n eglige neeYesYesB)

18、Ordi nary n eglige neeGross n eglige neeNoNoC)Ordi nary n eglige neeGross n eglige neeYesNoD)Ordi nary n eglige neeGross n eglige neeNoYesAn swer: ATerms: Auditor liability to clientsDiff: ModerateObjective: LO 5-3AACSB: Reflective thi nking skills6) Under the laws of agency, partners of a CPA firm

19、may be liable for the work of others on whom they rely. This would not in clude:A) employees of the CPA firm.B) employees of the audit clie nt.C) other CPA firms en gaged to do part of the audit work.D) specialists employed by the CPA firm to provide technical advice on the audit.An swer: BTerms: La

20、ws of age ncy. Part ners of CPA firm liable for work of others on whom they rely Diff: EasyObjective: LO 5-3AACSB: Reflective thi nking skills47) Absence of reasonable care that can be expected of a person in a set of circumstances defines:A) pecuniary negligence.B) gross negligence.C) extreme negli

21、gence.D) ordinary negligence.Answer: DTerms: Absence of reasonable careDiff: EasyObjective: LO 5-3AACSB: Reflective thinking skills8) An example of a breach of contract would likely include:A) an auditors refusal to return the clients general ledger book until the client paid last years audit fees.B

22、) a banks claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan.C) a CPA firms failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative.D) an auditors claim that t

23、he client staff is unqualified. Answer: CTerms: Breach of contractDiff: EasyObjective: LO 5-3AACSB: Reflective thinking skills9) Privity of contract exists between:A) auditor and the federal government.B) auditor and third parties.C) auditor and client.D) auditor and client attorney.Answer: CTerms:

24、Privity of contractDiff: EasyObjective: LO 5-3AACSB: Reflective thinking skills5Copyright ? 2014 Pearson Educati on, I nc.10) An individual who is not party to the contract between a CPA and the client, but who is known by both and is intended to receive certain benefits from the contract is known a

25、s:A) a third party.B) a common law inheritor.C) a tort.D) a third-party beneficiary.Answer: DTerms: Individual who is not a party to the contract between a CPA and client, but who is knownDiff: EasyObjective: LO 5-3 AACSB: Reflective thinking skills11) Laws that have been passed by the U.S. Congress

26、 and other governmental units are:A) statutory laws.B) judicial laws.C) federal laws.D) common laws.Answer: ATerms: Laws passed through state legislatures Diff: EasyObjective: LO 5-3AACSB: Reflective thinking skills12) The assessment against a defendant of the full loss suffered by a plaintiff regar

27、dless of the extent to which other parties shared in the wrongdoing is called:A) separate and proportionate liability.B) shared liability.C) unitary liability.D) joint and several liability.Answer: DTerms: Assessment against a defendant of the full loss suffered by a plaintiff Diff: EasyObjective: L

28、O 5-3AACSB: Reflective thinking skills13) The assessment against a defendant of that portion of the damage caused by the defendants negligence is called:A) separate and proportionate liability.B) joint and several liability.C) shared liability.D) unitary liability. Answer: A Terms: Assessment agains

29、t a defendant of that portion of the damages Diff: EasyObjective: LO 5-3 AACSB: Reflective thinking skills6Copyright ? 2014 Pearson Education, Inc.14) Fraud occurs when:A) a misstatement is made and there is both knowledge of its falsity and the intent to deceive.B) a misstatement is made and there

30、is knowledge of its falsity but no intent to deceive.C) the auditor lacks even slight care in the performance in performing the audit.D) the auditor has an absence of reasonable care in the performance of the audit.Answer: ATerms: Fraud and errorsDiff: EasyObjective: LO 5-3AACSB: Reflective thinking

31、 skills15) Which of the following most accurately describes constructive fraud?A) Absence of reasonable careB) Lack of slight careC) Knowledge and intent to deceiveD) Extreme or unusual negligence without the intent to deceiveAnswer: DTerms: Describes constructive fraudDiff: ModerateObjective: LO 5-

32、3AACSB: Reflective thinking skills16) Which of the following most accurately describes fraud?A) Absence of reasonable careB) Lack of slight careC) Knowledge and intent to deceiveD) Extreme or unusual negligence without the intent to deceiveAnswer: CTerms: Describes fraudDiff: ModerateObjective: LO 5

33、-3AACSB: Reflective thinking skills17) A third-party beneficiary is one which:A) has failed to establish legal standing before the court.B) does not have privity of contract and is unknown to the contracting parties.C) does not have privity of contract, but is known to the contracting parties and in

34、tended to benefit under the contract.D) may establish legal standing before the court after a contract has been consummated. Answer: CTerms: Third-party beneficiaryDiff: ModerateObjective: LO 5-3AACSB: Reflective thinking skills718) If the CPA negligently failed to properly prepare and file a client

35、s tax return, the CPA may be liable for:A) the penalties the client owes the IRS.B) the penalties and interest the client owes.C) the penalties and interest the client owes, plus the tax preparation fee the CPA charged.D) the penalties and interest, the tax preparation fee, and the amount of tax tha

36、t was underpaid. Answer: CTerms: Liability when a CPA negligently failed to properly prepare and file tax return Diff: ModerateObjective: LO 5-3AACSB: Reflective thinking skills19) Constructive fraud:A) is also known as recklessness.B) requires an intent to deceive.C) involves collusion with the cli

37、ent.D) is also known as breach of contract. Answer: ATerms: Support a finding of constructive fraudDiff: Moderate Objective: LO 5-3AACSB: Analytic skills820) Which of the followi ng stateme nts is true? AGross n eglige nee ma con stitute con structive fraudfFraud requires the intent to deceiveAll fr

38、aud should be detected duri ng auditYesYesNoB)Gross n eglige nee ma con stitute con structive fraudfFraud requires the intent to deceiveAll fraud should be detected duri ng auditNoYesNoC)Gross n eglige nee ma con stitute con structive fraudfFraud requires the intent to deceiveAll fraud should be det

39、ected duri ng auditYesNoYesD)Gross n eglige nee ma con stitute eon structive fraudfFraud requires the intent to deceiveAll fraud should be detected duri ng auditNoNoNoAn swer: ATerms: Gross n eglige nee, fraud, and con structive fraudDiff: ModerateObjective: LO 5-3AACSB:Reflective thi nking skills21

40、) The laws that have bee n developed through court decisi ons are called:A) com mon laws.B) crim in al laws.C) statutory laws.D) civil laws.An swer: ATerms: Com mon lawDiff: EasyObjective: LO 5-3AACSB:Reflective thi nking skills922) Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a sta

41、ff accountant. Elise was negligent while auditing several of the firms clients. Under these circumstances, which of the following statements is true?A) Elise would have no personal liability for negligence.B) Gregory & Hedrick is not liable for Elises negligence because CPAs are generally considered

42、 to be independent contractors.C) Gregory & Hedrick would not be liable for Elises negligence if Elise disobeyed specific instructions in the performance of the audits.D) Gregory & Hedrick can recover against its insurer on its malpractice policy even if one of the partners was also negligent in rev

43、iewing Elises work.Answer: DTerms: Auditor negligent while auditingDiff: ChallengingObjective: LO 5-3AACSB: Reflective thinking skills23) The legal term for when an auditor issues an audit opinion, knowing that an adequate audit was not performed is a:A) breach of contract.B) tort action for neglige

44、nce.C) constructive fraud.D) fraud.Answer: CTerms: Failure of party to meet its obligations, causing injury to another partyDiff: ModerateObjective: LO 5-3AACSB: Reflective thinking skills24) Define ordinary negligence, gross negligence, and constructive fraud.Answer: Ordinary negligence is the abse

45、nce of reasonable care that can be expected of a person is a set of circumstances. For auditors, it is in terms of what other competent auditors would have done in the same situation.Gross negligence is the lack of even slight care, tantamount to reckless behavior, that can be expected of a person i

46、n a set of circumstances.Constructive fraud is the existence of extreme or unusual negligence even though there was no intent to deceive or to do harm. It is also termed reckless, in the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even

47、though there was no intention of deceiving statement users.Terms: Ordinary negligence, gross negligence, and constructive fraudDiff: EasyObjective: LO 5-3AACSB: Reflective thinking skills1025) An important concept in contract law for accountants to understand is the third-party beneficiary doctrine.

48、 Explain and give an example.Answer: A third party who does not have privity of contract but is known to the contracting parties and is intended to have certain rights and benefits under the contract. Example: bank has a large loan outstanding at the balance sheet date and requires an audit as part

49、of the loan agreement.Terms: Contract law; Third-party beneficiary doctrineDiff: EasyObjective: LO 5-3AACSB: Reflective thinking skills26) Distinguish between constructive fraud and fraud.Answer: Constructive fraud is the existence of extreme or unusual negligence even though there was no intent to

50、deceive or do harm. In contrast, fraud occurs when a misstatement is made and there is both knowledge of its falsity and the intent to deceive.Terms: Constructive fraud and fraudDiff: ModerateObjective: LO 5-3AACSB: Reflective thinking skills27) Distinguish between joint and several liability and se

51、parate and proportionate liability. Answer: Under joint and several liability, the defendant can be assessed the full loss suffered by the plaintiff, regardless of the extent to which other parties shared in the wrongdoing. In contrast, under separate and proportionate liability, the defendant is as

52、sessed that portion of the damage caused by the defendants negligence.Terms: Joint and several liability and separate and proportionate liabilityDiff: Moderate Objective: LO 5-3 AACSB: Reflective thinking skills1128) Match seven of the legal terms (a-j) with the definitions provided below (1-7):a. C

53、ommon lawb. Constructive fraudc. Breach of contractd. Joint and several liabilitye. Ordinary negligencef. Third-party beneficiaryg. Gross negligenceh. Statutory lawi. Fraudj. Separate and proportionate liability 1. Laws that have been passed by the U.S. Congress and other governmental units. 2. Abse

54、nce of reasonable care that can be expected of a person in a set of circumstances. 3. Lack of even slight care, tantamount to reckless behavior that can be expected of a person. 4. The assessment against a defendant of that portion of the damage caused by the defendants negligence. 5. Failure of one

55、 or both parties in a contract to fulfill the requirements of the contract. 6. The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing. 7. Existence of extreme or unusual negligence even though there was no

56、intent to deceive or do harm; also termed recklessness.Answer:1. h2. e3. g4. j5. c6. d7. bTerms: Constructive fraud; Breach of contract; Joint and several liability; Separate and proportionate liability; Gross negligence; Ordinary negligence; Statutory lawDiff: ModerateObjective: LO 5-3AACSB: Reflec

57、tive thinking skills1229) The standard of due care to which the auditor is expected to be held is referred to as the prudent person concept.A) TrueB) False Answer: A Terms: Standard of due care; Prudent person concept Diff: EasyObjective: LO 5-3AACSB: Reflective thinking skills30) In a CPA firm operating as a limited liability partnership (LLP), the liability for one partners action