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Multiple Choice
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1

Which of the following is not an activity that would take place during the legal process stage of Palmrose's four general stages in the initiation and disposition of audit-related disputes?
A)Filing of a complaint.
B)Hiring another public accounting firm to investigate potential fraud.
C)Discovery.
D)Trial preparation.
2

Which of the following statements is generally correct regarding the liability of a CPA who negligently expresses an opinion on an audit of a client's financial statements?
A)The CPA is liable only to those third parties who are in privity of contract with the CPA.
B)The CPA is liable only to the client.
C)The CPA is liable to anyone in a class of third parties who the CPA knows will rely on the opinion.
D)The CPA is liable to all possible foreseeable users of the CPA's opinion.
3

Under the liability provisions of Section 11 of the Securities Act of 1933, which of the following must a plaintiff prove to hold a CPA liable?

I. The misstatements contained in the financial statements certified by the CPA were material.
II. The plaintiff relied on the CPA's unqualified opinion.
A)I only.
B)II only.
C)Both I and II.
D)Neither I nor II.
4

Which of the following is the best defense a CPA firm can assert to a suit for common-law fraud based on its unqualified opinion on materially false financial statements?
A)Lack of privity.
B)Lack of scienter.
C)Contributory negligence on the part of the client.
D)A disclaimer contained in the engagement letter.
5

Which of the following is true with regard to the 1996 Phar-Mor case involving Coopers & Lybrand?
A)It created a more general awareness of the auditor's exposure to criminal prosecution.
B)It extended the auditor's responsibility for financial statements of subsidiaries.
C)It extended the auditor's responsibilities for events after the end of the audit period.
D)It illustrates the auditor's common-law responsibilities to third parties when charged with a reckless disregard for the truth.
6

Which of the following types of legislation requires most publicly-held companies to file a 10-K form?
A)The Securities Exchange Act of 1934.
B)The Securities Act of 1933.
C)The Foreign Corrupt Practices Act.
D)The Public Reporting Act of 1933.
7

Based on the "Ultramares Rule" (1931), which of the following parties would a court likely hold an accountant liable to for ordinary negligence?
A)Parties in Privity of Contract: No; Foreseen Parties: No
B)Parties in Privity of Contract: No; Foreseen Parties: Yes
C)Parties in Privity of Contract: Yes; Foreseen Parties: No
D)Parties in Privity of Contract: Yes; Foreseen Parties: Yes
8

All of the following are provisions of the Sarbanes-Oxley Act of 2002 except which one?
A)Delegation of authority and responsibility to the SEC.
B)Creation of the Public Company Accounting Oversight Board [PCAOB].
C)Elimination of the Auditing Standard Board's authority to set standards for the audit of non-public companies.
D)Increased responsibilities to corporate officers and board members.
9

Prior to the beginning of Enron Corporation's collapse in 2001, the company overstated profits primarily by:
A)Recognizing revenues prior to delivery of services.
B)Treating routine operating expenses as capital expenditures subject to depreciation.
C)Failing to write-down to market value several impaired assets.
D)Misusing special purpose entities to an effort to conceal losses.
10

One of the most common ways for a CPA firm to demonstrate a "lack of duty" type of legal defense is by the use of:
A)An engagement letter.
B)A client representation letter.
C)The Private Securities Litigation Reform Act of 1995.
D)A set of audit working papers adhering to GAAS.





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