Multiple Choice Questions
1. In a common-law suit for damages, the jury awards the plaintiffs $1 million. The jury also determines that management is 80% at fault, the auditors are 15% at fault, and management’s counsel is 5% at fault. Assume that management is unable to pay any damages. Under joint and several liabilities, the auditor would be responsible for damages of:
a. $1 million
b. $750,000
c. $270,000
d. $150,000
2. Use the same facts as in Problem. Under proportionate liability, the auditor would be responsible for damages of:
a. $1 million
b. $750,000
c. $270,000
d. $150,000
3. Nast Corp. orally engaged Baker & Co., CPAs, to audit its financial statements. Nast management informed Baker that it suspected the accounts receivable were materially overstated. Although the financial statements audited by Baker did, in fact, include a materially overstated accounts receivable balance, Baker issued an unqualified opinion. Nast relied on the financial statements in deciding to obtain a loan from Century Bank to expand its operations. Nast has defaulted on the loan and has incurred a substantial loss. If Nast sues Baker for negligence in failing to discover the overstatement, Baker’s best defense would be that:
a. Baker did not perform the audit recklessly or with intent to deceive.
b. Baker was not in privity of contract with Nast.
c. Baker performed the audit in accordance with generally accepted auditing standards.
d. Baker had not signed an engagement letter.
4. If a stockholder sues a CPA for common-law fraud based on false statements contained in the financial statements audited by the CPA, which of the following, if present, would be the CPA’s best defense?
a. The stockholder lacks privity to sue.
b. The false statements were immaterial.
c. The CPA did not financially benefit from the alleged fraud.
d. The client was guilty of contributory negligence.
5. In a common-law action against an accountant, lack of privity is a viable defense if the plaintiff:
a. Is the client’s creditor who sues the accountant for negligence.
b. Can prove the presence of gross negligence that amounts to a reckless disregard for the truth
c. Is the accountant’s client
d. Bases the action upon fraud
6. Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client’s financial statements?
a. The CPA is liable only to third parties in privity of contract with the CPA.
b. The CPA is liable only to known users of the financial statements.
c. The CPA probably is liable to any person who suffered a loss as a result of the fraud.
d. The CPA probably is liable to the client, even if the client was aware of the fraud and did not rely on the opinion.
7. One of the elements necessary to hold a CPA liable to a client for negligently conducting an audit is that the CPA:
a. Acted with scienter
b. Was a fiduciary of the client?
c. Failed to exercise due care
d. Executed an engagement letter