Question: Multiple choice 1 Cable Corporation orally engaged Drake Company

Multiple choice
1. Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial statements. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake’s best defense would be that Drake did not
a. Have privity of contract with Cable.
b. Sign an engagement letter.
c. Perform the audit recklessly or with anintent to deceive.
d. Violate generally accepted auditing standards in performing the audit.

2. Which of the following best describes whether a CPA has met the required standard of care in auditing an entity’s financial statements?
a. Whether the client’s expectations are met with regard to the accuracy of audited financial statements.
b. Whether the statements conform to generally accepted accounting principles.
c. Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances.
d. Whether the audit was conducted to investigate and discover all acts of fraud.

3. Jenna Corporation approved a merger plan with Cord Corporation. One of the determining factors in approving the merger was the financial statements of Cord, which had been audited by Frank & Company, CPAs. Jenna had engaged Frank to audit Cord’s financial statements. While performing the audit, Frank failed to discover fraud that later caused Jenna to suffer substantial losses. For Frank to be liable under common- law negligence, Jenna at a minimum must prove that Frank
a. Knew of the fraud.
b. Failed to exercise due care.
c. Was grossly negligent.
d. Acted with scienter.

4. Brown & Company, CPAs, issued an unqualified opinion on the financial statements of its client King Corporation. Based on the strength of King’s financial statements, Safe Bank loaned King $ 500,000. King Corporation and Safe Bank are both located in a state that follows the Ultramares doc-trine. Brown was unaware that Safe would receive a copy of the financial statements or that they would be used by King in obtaining a loan. King defaulted on the loan. If Safe commences an action for ordinary negligence against Brown, and Brown believes it will be able to prove that it conducted the audit in conformity with GAAS, Brown will
a. Be liable to Safe, because Safe relied on the financial statements.
b. Be liable to Safe, because the statute of frauds has been satisfied.
c. Not be liable to Safe, because there is a conclusive legal presumption that following GAAS is the equivalent of acting reasonably and with due care.
d. Not be liable to Safe, because there was a lack of privity of contract.

5. How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors’ liability to purchasers of securities beyond that of common law?
a. Purchasers have to prove only that a loss was caused by reliance on audited financial statements.
b. Privity with purchasers is not a necessary element of proof.
c. Purchasers have to prove either fraud or gross negligence as a basis for recovery.
d. Auditors are held to a standard of care described as “professional skepticism.”

6. To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove

Questions 20- 20 and 20- 21 are based on the following information: Dart Corporation engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart’s financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay’s opinion was included in Dart’s registration statement. Hansen purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known.
7. In a suit against Jay and Dart under the Section 11 liability provisions of the Securities Act of 1933, Hansen must prove that
a. Jay knew of the misstatements.
b. Jay was negligent.
c. The misstatements contained in Dart’s financial statements were material.
d. The unqualified opinion contained in the registration statement was relied on by Hansen.

8. If Hansen succeeds in the Section 11 suit against Dart, Hansen will be entitled to
a. Damages of three times the original public offering price.
b. Rescind the transaction.
c. Monetary damages comparable to the loss suffered.
d. Damages, but only if the shares were resold before the suit was started.

9. Fritz Corporation, whose shares are publicly traded, engaged Hay Associates, CPAs, to audit its financial statements. Hay gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Hay’s opinion was included in Fritz’s Form 10- K filed with the Securities and Exchange Commission. Samson purchased shares and suffered a loss when the stock declined in value after the misstatements became known. In a suit against Hay under the antifraud provisions of Section 10( b) and Rule 10b- 5 of the Securities Exchange Act of 1934, Samson must prove all of the following except that
a. Samson was a foreseen user of the financial statements.
b. Samson suffered a loss as a result of reliance on the financial statements.
c. The stock purchase involved a national securities exchange.
d. Hay acted with intent to deceive.

10. Under the Private Securities Litigation Reform Act, Baker, CPA, reported certain uncorrected illegal acts to Supermart’s board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal acts had a material effect on Supermart’s financial statements. Supermart failed to take appropriate remedial action, and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to
a. Resign from the audit engagement within 10 business days.
b. Deliver a report concerning the illegal acts to the SEC within one business day.
c. Notify the stockholders that the financial statements are materially misstated.
d. Withhold an audit opinion until Supermart takes appropriate remedial action.

11. Which of the following is not a provision of the Sarbanes- Oxley Act?
a. A requirement to retain audit work papers for at least five years.
b. It is a criminal offense to take any harmful action in retaliation against anyone who voluntarily comes forward to report a suspected accounting or securities fraud.
c. Broad investigative and disciplinary authority over registered public accounting firms is granted to the Public Company Accounting Oversight Board.
d. The statute of limitations for actions under Section 10(b) and Rule 10b- 5 was reduced to one year from the discovery of fraud and five years after the fraud occurred. LO 20- 10

12. Which of the following is a provision of the Foreign Corrupt Practices Act?
a. It is a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business.
b. The auditor’s detection of illegal acts committed by officials of the auditor’s publicly held client in conjunction with foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission.
c. If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not reasonably estimated, the auditor’s report should be modified.
d. Every publicly held company must devise, document, and maintain a sys-tem of internal accounting controls sufficient to provide reasonable assurance that internal control objectives aremet.

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