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Exam 11: Liability of Accountants and Other Professionals

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Question 21

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"Accountant Dissatisfaction." Paul agreed to perform accounting services for Teresa, and they entered into a contract setting forth the terms of their agreement. Teresa wanted Paul to review her financial information and her system of internal controls. Teresa became dissatisfied with Paul's work after he reported some irregularities in her financial statements. Paul, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal. -Assuming that Teresa can establish that Paul failed to meet his contractual obligations, which of the following would be available to her?

A) Only a recovery for the cost of obtaining a different accountant to perform breached contractual duties.
B) Reasonable and foreseeable damages related to the breach excluding the cost of another accountant to perform breached contractual duties.
C) Reasonable and foreseeable damages related to the breach and damages for fraud which would be presumed.
D) The cost of obtaining a different accountant to perform breached contractual duties and also any reasonable and foreseeable damages related to the breach.
E) Nothing unless the contact specifically provides for damages in the event of a breach.

F) C) and E)
G) A) and E)

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Question 22

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What is the rationale behind the Restatement Test of accountant liability to third-parties?

A) The economy will benefit if investors recognize that they have sufficient rights of recovery.
B) It is only fair to hold accountants liable if they are in privity with a plaintiff.
C) Much of what accountants do is prepare work for parties that are not their clients and therefore, it makes sense for accountants to owe a duty to intended receivers.
D) Potential investors should have a route of recovery even if they could not be foreseen by accountants.
E) The general public should have a route of recovery even if they could not be foreseen by the accountant.

F) A) and B)
G) A) and C)

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Question 23

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Which of the following is true regarding states that have adopted the reasonably foreseeable users test for accountant liability to third-parties?

Which of the following is true regarding the liability of accountants under the law of Canada?

"Prenuptial Agreement." Rhonda performed accounting services for Greg's used car business. She had a contract with Greg to the effect that she would audit his books and financial statements for his own use, not for the purpose of obtaining loans. In auditing Greg's business, she developed various notes, calculations, memorandums, and other papers. Candace, Greg's fiancé, approached Rhonda to inquire about Greg's business. Candace and Rhonda had been friends for many years. Rhonda allowed Candace to look at the various notes, calculations, and other papers resulting from her review of Greg's financial statements and other records. Candace told Rhonda that she really needed to investigate Greg because they were thinking of getting married, and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement. Rhonda agreed and proceeded to discuss Greg's finances with Candace revealing all the information that Greg had disclosed to her. Candace broke up with Greg telling him that after what she discovered from Rhonda, she was concerned that Greg could not support her in the way in which she wanted to become accustomed. Greg was very angry with Rhonda and told her that she was unethical and had violated the accountant-client privilege. -Which of the following is accurate regarding Greg's assertion that Rhonda violated the accountant-client privilege?

"Wedding Plans." Selena, a certified public accountant, is hired by Bob to do an audit on his business. He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan, probably from ABC Bank. Later, however, Bob changes his mind and uses the approved financial statements from Selena to get a loan for $100,000 from XYZ Bank. On the same day that she was hired by Bob, Selena, who specializes in reviewing financial statements for companies seeking loans, was approached by Carl who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank. Selena approved the statements, and he got a loan from ABC Bank. Additionally, Alice requested that Selena review her financial statements so that she could get a loan of $25,000 from a rich uncle. Selena is a bit uneasy about Alice because she believes that Alice is somewhat untrustworthy. Therefore, Selena requires that Alice agree in writing that the report will be transmitted only to the uncle, not to any other potential lenders. Selena approved the financial statements but, in fact, Alice uses the approved statements to get a loan for $25,000 from XYZ Bank. During the time that she had set aside to audit and review the financial statements of Bob, Carl, and Alice, Selena was also preparing for her wedding. She was engaged in choosing menus, dress fittings, and parties. All of this negatively affected her work and she negligently approved all financial statements referenced. Unfortunately, Bob, Carl, and Alice ended up defaulting on the loans. The lenders sued Selena. -Under the Restatement Test, as discussed in the case in the text, Bily v. Arthur Young & Co., which of the following is true regarding the effort by XYZ Bank to recover against Selena based upon Alice's default?

"Accountant Dissatisfaction." Paul agreed to perform accounting services for Teresa, and they entered into a contract setting forth the terms of their agreement. Teresa wanted Paul to review her financial information and her system of internal controls. Teresa became dissatisfied with Paul's work after he reported some irregularities in her financial statements. Paul, on the other hand, claimed that he had adequately performed his duties and that, at the most, any mistakes that he made were minimal. -If Paul ______________ performed on the contract, he may be entitled to complete compensation minus the amount of damages caused by the breach.

Which of the following is true regarding states adhering to the privity or near privity rule for third party liability of accountants?

Which of the following involves accountant liability to third parties based upon privity or near privity?

Generally, unless engaged to detect __________, an accountant is not a fraud detector unless the fraud is uncovered in the course of exercising reasonable care and skill.

The Sarbanes-Oxley Act prohibits registered public accounting firms from engaging in non-auditing acts for their auditing clients. List any six such non-auditing acts currently prohibited.

GAAS was established by which of the following?

An action against an accountant for failing to properly perform the job for which the accountant was hired is referred to as a[n] _________ action.

In the Case Opener "WorldCom," the court ruled that the chairman of WorldCom's board of directors could have no personal liability for misrepresentations of the company's condition in filings with the Securities and Exchange Commission.

Which of the following may be held liable in a malpractice action?

When an audit is complete, an accountant usually issues a[n] _______________ letter stating his or her assessment of the company that was audited.

Over the last few years, plaintiffs have been successful in bringing fraud suits against accountants under the Racketeer Influenced and Corrupt Organizations Act.

Under which of the following tests is an accountant held liable to any third-party that was or should have been foreseen as a possible user of the accountant's work product and that, in fact, did use and rely upon that work product for a proper business purpose?

Which of the following requires accountants to use adequate procedures so that they can detect illegal acts committed by an audited company?

Under the _____, an accountant is liable to known third-party users of the accountant's work product and also to those in the limited class whose reliance on the work the accountant specifically foresaw.