Auditing Chapter 5

37 Questions  I  By Kosdaisy on December 11, 2011
Quiz based on Auditing and Assurance Services 14e by Arens

  

Question Excerpt

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1.  While performing services for their clients, professionals have a duty to provide a level of care which is
A.
B.
C.
D.
2.  Auditors who fail to exercise due care in their performance of professional services may be liable for:
A.
B.
C.
D.
3.  Auditors may be liable to their clients for: Punitive damages   Compensatory damages
A.
B.
C.
D.
4.  “Absence of reasonable care that can be expected of a person in a set of circumstances” defines:
A.
B.
C.
D.
5.  An example of a breach of contract would likely include:
A.
B.
C.
D.
6.  Privity of contract exists between:
A.
B.
C.
D.
7.  Which of the following is an illustration of liability to clients under common law?
A.
B.
C.
D.
8.  Which of the following is an illustration of liability under the federal securities acts?
A.
B.
C.
D.
9.  If the CPA negligently failed to properly prepare and file a client’s tax return, the CPA may be liable for:
A.
B.
C.
D.
10.  “Privileged communication” between client and auditor is:
A.
B.
C.
D.
11.  Which of the following statements is true? Gross negligence may constitute constructive fraud  Fraud requires the intent to deceive   All fraud should be detected during audit
A.
B.
C.
D.
12.  Failure of a party to meet its obligations, thereby causing injury to another party to whom a duty was owed, is:
A.
B.
C.
D.
13.  The principal issue to be resolved in cases involving alleged negligence is usually:
A.
B.
C.
D.
14.  In the auditing environment, failure to meet auditing standards is often:
A.
B.
C.
D.
15.  The prudent person concept establishes that:
A.
B.
C.
D.
16.  To succeed in an action against the auditor, the client must be able to show that:
A.
B.
C.
D.
17.  The increased litigation under the federal securities laws has resulted from:     The availability of class-action litigation   The strict liability standards imposed on CPAs by the securities laws         An excess of attorneys
A.
B.
C.
D.
18.  Which of the following statements about the Securities Act of 1933 is not true?
A.
B.
C.
D.
19.  Under the Securities Act of 1933, the auditor’s responsibility for making sure the financial statements were fairly stated extends to:
A.
B.
C.
D.
20.  Under the Securities Exchange Act of 1934, which type of organizations is required to submit audited financial statements to the SEC?
A.
B.
C.
D.
21.  The Securities and Exchange Commission can impose all but which of the following sanctions?
A.
B.
C.
D.
22.  The Foreign Corrupt Practices Act (FCPA) of 1977:
A.
B.
C.
D.
23.  While the Foreign Corrupt Practices Act of 1977 remains in effect, it has been largely superseded by which of the following?
A.
B.
C.
D.
24.  A major purpose of federal securities regulations is to:
A.
B.
C.
D.
25.  Tort actions can be based on which of the following? Ordinary negligence   Gross negligence
A.
B.
C.
D.
26.  Which of the following resulted in a federal law passed in 1995 that significantly reduced potential damages in securities-related litigation?
A.
B.
C.
D.
27.  The Private Securities Litigation Reform Act of 1995 reduced potential damages in securities-related litigation, but because the act applied only to federal courts, attorneys began taking cases to state courts. Which of the following eliminated this loophole?
A.
B.
C.
D.
28.  The most significant audit issue that came as a result of the court decision in the Escott  et al. v. Bar Chris Construction Corporation case in 1968 was:
A.
B.
C.
D.
29.  Under the federal securities acts, one significant result occurring directly due to the Escott et al. v. Bar Chris Construction Corporation case was that SAS was changed to require:
A.
B.
C.
D.
30.  Under the Securities Exchange Act of 1934, most of the litigation against the auditor has been generated because of the auditor’s involvement with the:
A.
B.
C.
D.
31.  Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to as:
A.
B.
C.
D.
32.  In a leading securities law and CPA liabilities case, the U.S. Supreme Court ruled in 1976 in Hochfelder v. Ernst & Ernst that before CPAs could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934, what would be required to be shown to the court was the auditor’s:
A.
B.
C.
D.
33.  The Securities and Exchange Commission has authority to:
A.
B.
C.
D.
34.  Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff accountant.  Elise was negligent while auditing several of the firm’s clients. Under these circumstances, which of the following statements is true?
A.
B.
C.
D.
35.  The King Surety Company wrote a general fidelity bond covering thefts of assets by the employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled $17,200 of company funds. When the activities were discovered, King paid Wilson the full amount in accordance with the terms of the fidelity bond, and then sought recovery against Wilson’s auditors, Lynch & Merritt, CPAs. Which of the following would be Lynch & Merritt’s best defense?
A.
B.
C.
D.
36.  As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company’s controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft?
A.
B.
C.
D.
37.  In connection with a public offering of first mortgage bonds by Henson Corp., the bond underwriter has asked Henson’s CPA to furnish him with a comfort letter giving as much assurance as possible relative to Henson’s unaudited financial statements for the three months ended March 31, 2007. The CPA had expressed an unqualified opinion on Henson’s financial statements for the year ended December 31, 2006 and he has performed a limited review of Henson’s financial statements for the three months ended March 31, 2007. Nothing has come to his attention that would indicate that the March 31, 2007 statements are not properly presented. Under these circumstances, the CPA’s response to the underwriter’s request should be to:
A.
B.
C.
D.
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