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Chapter5final
CHAPTER5
Multiple-ChoiceQuestions
1.
easy
d
Whileperformingservicesfortheirclients,professionalshaveadutytoprovidealevelofcarewhichis:
a.freefromjudgmenterrors.
b.superior.
c.greaterthanaverage.
d.reasonable.
2.
easy
b
Auditorswhofailtoexerciseduecareintheirperformanceofprofessionalservicesmaybeliablefor:
a.punitiveliability.
b.breachofcontract.
c.excessliability.
d.noneoftheabove.
3.
easy
b
Whichofthefollowingmaygiverisetoabusinessfailure?
a.Anerroneousauditopinionisissued.
b.Managementmaymakeill-advisedbusinessdecisions.
c.Auditorsmayfailtouncoveremployeefraud.
d.Poorlytrainedauditorsmayperformacompany’saudit.
4.
easy
b
A(n)_____failureoccurswhenanauditorissuesanerroneousopinionastheresultofanunderlyingfailuretocomplywithauditingstandards.
a.business
b.audit
c.auditrisk
d.process
5.
easy
a
Thestandardofduecaretowhichtheauditorisexpectedtoadhereisreferredtoasthe:
a.prudentpersonconcept.
b.commonlawdoctrine.
c.duecareconcept.
d.vigilantpersonconcept.
6.
easy
c
Auditorsmaybeliabletotheirclientsfor:
a.punitivedamages.
b.compensatorydamages.
b.bothaandb.
c.neitheranorb.
7.
easy
b
Underthelawsofagency,partnersofaCPAfirmmaybeliablefortheworkofothersonwhomtheyrely.Thiswouldnotinclude:
a.employeesoftheCPAfirm.
b.employeesoftheauditclient.
c.otherCPAfirmsengagedtodopartoftheauditwork.
d.specialistsemployedbytheCPAfirmtoprovidetechnicaladviceontheaudit.
8.
easy
d
“Absenceofreasonablecarethatcanbeexpectedofapersoninasetofcircumstances”defines:
a.pecuniarynegligence.
b.grossnegligence.
c.extremenegligence.
d.ordinarynegligence.
9.
easy
c
Anexampleofabreachofcontractwouldlikelyinclude:
a.anauditor’srefusaltoreturntheclient’sgeneralledgerbookuntiltheclientpaidlastyear’sauditfees.
b.abank’sclaimthatanauditorhadadutytouncovermaterialerrorsinfinancialstatementsthathadbeenreliedoninmakingaloan.
c.aCPAfirm’sfailuretocompleteanauditontheagreed-upondatebecausethefirmhadabacklogofotherworkwhichwasmorelucrative.
d.noneoftheabove.
10.
easy
c
Privityofcontractexistsbetween:
a.auditorandthefederalgovernment.
b.auditorandthirdparties.
c.auditorandclient.
d.alloftheabove.
11.
easy
b
Auditcontracts(engagementletters):
a.maybeeitheroralorwritten.
b.mustbewritten.
c.mustbewrittenandnotarized.
d.mustbewritteniftheclientisregulatedbytheSecuritiesandExchangeCommission.
12.
easy
d
AnindividualwhoisnotpartytothecontractbetweenaCPAandtheclient,butwhoisknownbybothandisintendedtoreceivecertainbenefitsfromthecontractisknownas:
a.athirdparty.
b.acommonlawinheritor.
c.atort.
d.athird-partybeneficiary.
13.
easy
d
Lawsthathavebeendevelopedthroughcourtdecisionsratherthanbypassagethroughlegislativebodiesare:
a.statutorylaws.
b.judiciallaws.
c.federallaws.
d.commonlaws.
14.
easy
a
Lawsthathavebeenpassedthroughstatelegislaturesare:
a.statutorylaws.
b.judiciallaws.
c.federallaws.
d.commonlaws.
15.
easy
d
Theassessmentagainstadefendantofthefulllosssufferedbyaplaintiffregardlessofotherparties’liabilityinthewrongdoingiscalled:
a.separateandproportionateliability.
b.sharedliability.
c.unitaryliability.
d.jointandseveralliability.
16.
easy
c
_____riskrepresentsthepossibilitythattheauditorconcludesafterconductinganadequateauditthatthefinancialstatementswerefairlystatedwhentheywereactuallymisstated.
a.Business
b.Process
c.Audit
d.Failure
17.
easy
a
Theassessmentagainstadefendantofthatportionofthedamagecausedbythedefendant’snegligenceiscalled:
a.separateandproportionateliability.
b.jointandseveralliability.
c.sharedliability.
d.unitaryliability.
18.
easy
a
Inthird-partysuits,whichoftheauditor’sdefensescontendslackofprivityofcontract?
a.Lackofduty.
b.Non-negligentperformance.
c.Contributorynegligence.
d.Absenceofcausalconnections.
19.
easy
c
Whichofthefollowingauditor’sdefensesusuallymeansnon-relianceonthefinancialstatementsbytheuser?
a.Lackofduty.
b.Non-negligentperformance.
c.Lackofcausalconnections.
d.Contributorynegligence.
20.
easy
a
ThereareanumberofthingsthattheAICPA,representingtheprofessionasawhole,candotoreducetheCPA’sexposuretolawsuits.Oneofthemisto:
a.sanctionmembersforimproperconductandperformance.
b.dealonlywithclientspossessingintegrity.
c.hirequalifiedauditorsandtrainandsupervisethem.
d.performqualityaudits.
21.
easy
b
Inconnectionwiththeauditoffinancialstatements,anindependentauditorcouldberesponsibleforfailuretodetectamaterialfraudif:
a.statisticalsamplingtechniqueswerenotusedontheauditengagement.
b.theauditorplannedtheauditinanegligentmanner.
c.accountantsperformingimportantpartsoftheworkfailedtodiscoveracloserelationshipbetweenthetreasurerandthecashier.
d.thefraudwasperpetratedbyoneemployeewhocircumventedtheexistinginternalcontrols.
22.
medium
b
Whichofthefollowingmostaccuratelydescribesconstructivefraud?
a.Absenceofreasonablecare.
b.Lackofslightcare.
c.Knowledgeandintenttodeceive.
d.Extremeorunusualnegligencewithouttheintenttodeceive.
23.
medium
c
Whichofthefollowingmostaccuratelydescribesfraud?
a.Absenceofreasonablecare.
b.Lackofslightcare.
c.Knowledgeandintenttodeceive.
d.Extremeorunusualnegligencewithouttheintenttodeceive.
24.
medium
a
Whichofthefollowingisanillustrationofliabilitytoclientsundercommonlaw?
a.Clientsuesauditorfornotdiscoveringatheftofassetsbyanemployee.
b.Banksuesauditorfornotdiscoveringthatborrower’sfinancialstatementsaremisstated.
c.Combinedgroupofstockholderssueauditorfornotdiscoveringmateriallymisstatedfinancialstatements.
d.Federalgovernmentprosecutesauditorforknowinglyissuinganincorrectauditreport.
25.
medium
c
Whichofthefollowingisanillustrationofliabilityunderthefederalsecuritiesacts?
a.Clientsuesauditorfornotdiscoveringatheftofassetsbyanemployee.
b.Banksuesauditorfornotdiscoveringthatborrower’sfinancialstatementsaremisstated.
c.Combinedgroupofstockholderssueauditorfornotdiscoveringmateriallymisstatedfinancialstatements.
d.Noneoftheabove.
26.
medium
c
Athird-partybeneficiaryisonewhich:
a.hasfailedtoestablishlegalstandingbeforethecourt.
b.doesnothaveprivityofcontractandisunknowntothecontractingparties.
c.doesnothaveprivityofcontract,butisknowntothecontractingpartiesandintendedtobenefitunderthecontract.
d.mayestablishlegalstandingbeforethecourtafteracontracthasbeenconsummated..
27.
medium
c
IftheCPAnegligentlyfailedtoproperlyprepareandfileaclient’staxreturn,theCPAmaybeliablefor:
a.thepenaltiestheclientowestheIRS.
b.thepenaltiesandinteresttheclientowes.
c.thepenaltiesandinteresttheclientowes,plusthetaxpreparationfeetheCPAcharged.
d.thepenaltiesandinterest,thetaxpreparationfee,andtheamountoftaxthatwasunderpaid.
28.
medium
d
Historically,mostmajorlawsuitsagainstCPAfirmshavedealtwith:
a.disputesoverincometaxpreparationservices.
b.disputesarisingintheperformanceofMAScontracts.
c.disputesovertheaccuracyofbookkeepingservices.
d.auditedandunauditedfinancialstatements.
29.
medium
c
“Privilegedcommunication”betweenclientandauditoris:
a.availableinallfederalcourts.
b.notavailableinanycourt.
c.availableinseveralstates.
d.availableformattersinvolvingincometaxesonly.
30.
medium
d
Whichofthefollowingstatementsistrue?
a.Grossnegligencemayconstituteconstructivefraud.
b.Constructivefraudisalsotermedrecklessness.
c.Fraudrequirestheintenttodeceive.
d.Allthreeabovearetrue.
31.
medium
b
Failureofapartytomeetitsobligations,therebycausinginjurytoanotherpartytowhomadutywasowed,is:
a.breachofcontract.
b.tortactionfornegligence.
c.constructivefraud.
d.fraud.
32.
medium
d
TortactionsagainstCPAsaremorecommonthanbreachofcontractactionsbecause:
a.therearemoretortsthancontracts.
b.theburdenofproofisontheauditorratherthanonthepersonsuing.
c.thepersonsuingneedproveonlynegligence.
d.theamountsrecoverablearenormallylarger.
33.
medium
c
Theprincipalissuetoberesolvedincasesinvolvingallegednegligenceisusually:
a.theamountofthedamagessufferedbyplaintiff.
b.whethertoimposepunitivedamagesondefendant.
c.thelevelofcareexercisedbytheCPA.
d.whetherdefendantwasinvolvedinfraud.
34.
medium
c
Intheauditingenvironment,failuretomeetauditingstandardsisoften:
a.anacceptedpractice.
b.asuggestionofnegligence.
c.conclusiveevidenceofnegligence.
d.tantamounttocriminalbehavior.
35.
medium
b
AcommonwayforaCPAfirmtodemonstrateitslackofdutytoperformisbyuseofa(n):
a.expertwitness’testimony.
b.auditcontract,orengagementletter.
c.managementrepresentationletter.
d.confirmationletter.
36.
medium
a
Theprudentpersonconceptestablishesthat:
a.theCPAfirmisnotexpectedtomakeonlyperfectjudgments.
b.anauditinaccordancewithGAASissubjecttolimitationsandcannotberelieduponf