1. Which key component must be substantiated to derive causation in claims of professional negligence?

Direct proof of damages solely from the audit failure.

An error in judgment with no subsequent repercussions.

An irrelevant mistake that could not reasonably cause harm.

The link between the breach and the economic loss suffered.

2. Under the Sarbanes-Oxley Act (SOX), what is the main requirement for CEOs and CFOs under Section 302?

They must certify the accuracy of financial reports.

They must inform auditors about internal controls.

They must personally file all financial disclosures with the SEC.

They must ensure that all auditors are personally liable for errors.

3. Under common law, what must plaintiffs prove to establish liability against accountants for fraud?

False representation and reckless disregard for standards

Material misstatement and breach of ethics

False representation, knowledge of falsity, and intent to deceive

Compliance with all auditing standards

4. In scenarios of gross negligence, which element is crucial for holding an auditor liable?

Reckless disregard for due care standards.

Personal disagreements with the client.

Perfect adherence to all auditing goals.

Transmitting reports to third parties timely.

5. What is a key difference between common law and statutory law when addressing auditors' liabilities?

Common law evolves from judicial opinions, while statutory law is established through legislation.

Statutory law evolves from judicial opinions, while common law is established through legislation.

Both common law and statutory law evolve from judicial opinions.

Neither common law nor statutory law is relevant to auditors' liabilities.

6. Why might an auditor employ the materiality defense in a legal case?

To argue that alleged misstatements were too minor to influence decisions.

To confirm the existence of significant fraud.

To prove that all financial statements are identical.

To demonstrate full compliance with international trade laws.

7. In what ways has the Sarbanes-Oxley Act enhanced auditor accountability and oversight?

By requiring auditors to assess and report on internal controls.

By reducing the responsibilities of auditors in financial reporting.

By exempting small companies from any audit requirements.

By eliminating penalties for financial misrepresentations.

8. The due care defense for auditors means they acted as a prudent person would in similar circumstances.

True

False

9. Under the Sarbanes-Oxley Act, what are auditors' primary responsibilities with respect to internal controls?

• List the obligations related to verifying and reporting control effectiveness.

Ignoring internal control weaknesses unless material.

Ensuring internal controls are assessed for reliability and reported accurately.

Only documenting obvious fraud.

Delegating control assessments to third-party consultants.

10. What is the impact of proportionate liability under the Private Securities Litigation Reform Act (PSLRA) on auditors?

• Explain how this influences the extent of auditor responsibilities.

It relieves auditors of all damage responsibilities.

Auditors are liable for their share of responsibility, not for others' negligence.

It mandates auditors to shoulder full responsibility.

Auditors cannot be held accountable under PSLRA at all.

11. What role does privity play in an auditor's liability toward their client?

It establishes a direct contractual relationship impacting liability.

It removes any legal obligations towards accounting ethics.

It extends liabilities solely to third-party beneficiaries.

It nullifies all client-auditor agreements upon completion.

12. In auditing, what is the main distinction between negligence and recklessness?

Negligence is failing to take reasonable care while recklessness involves knowingly taking significant risks.

Negligence requires intent to deceive, while recklessness is absent of intent.

Negligence is always more severe than recklessness.

Negligence is the same as recklessness.

13. Which of these conditions must be met to hold an auditor liable for fraudulent misrepresentation?

• Identify the key elements necessary for establishing fraud claims.

Inadvertent errors in financial statements.

Lack of professional negligence.

Knowledge of falsity with intent to deceive.

Reliance by unrelated third parties.

14. What are the key defenses available to auditors facing legal action under common law?

• List the defenses auditors have against common law claims.
• Explain the relevance of each defense in dispute resolution.

Privity, contributory negligence, and due care.

Intent, causation, and breach of contract.

Statutory immunity, privity, and authorization.

Contractual breach, materiality, and due diligence.

15. The Supreme Court ruled a statement of opinion in a registration statement may not support Section 11 liability merely because it is "ultimately found incorrect".

True

False

16. Auditors are not liable under the concept of negligent misrepresentation if the third party's reliance was not foreseeable.

True

False

17. How can comparative negligence provide a balanced resolution in audit-related legal disputes?

By allocating a fair share of blame based on the relative fault of each party.

By entirely dismissing the claim if the client has any negligence.

By ensuring the auditor pays full damage irrespective of the client's actions.

By obligating the client to accept all blame due to engagement terms.

18. Which of the following is REQUIRED for auditors to establish a due care defense?

Violation of statutory law by the client

Adherence to generally accepted auditing standards

No documented audit report

False representation to third parties

19. What is required to establish auditor liability for negligent misrepresentation?

Foreseeable reliance by a third party.

Intent to deceive another party.

Compliance with reporting standards.

A material breach of SEC regulations.

20. According to the Foreign Corrupt Practices Act (FCPA), what must companies ensure regarding internal accounting controls?

That they prevent bribery and ensure accurate record-keeping.

That they promote excessive spending for auditing.

That they are updated annually regardless of performance.

That they are designed to detect every financial anomaly.

21. When can an auditor use due diligence as a defense against negligence claims?

When the auditor has followed generally accepted auditing standards.

When the client begins legal proceedings.

When errors are corrected within 30 days.

When financial statements are already published.

22. What are auditors' liabilities under Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934?

• Discuss the nature and range of these responsibilities.

Auditors are accountable only for typographical errors.

They are liable solely for negligence without fraud.

They must avoid intentional misstatement or fraudulent actions in financial documents.

They are automatically liable for all client misdeeds.

23. In the context of auditor-client relationships, what does 'privity' specifically refer to?

A general duty to the public

Contractual obligation and direct relationship

Obligations only to third parties

An ethical duty without legal backing