Professional Documents
Culture Documents
ANSWER: D
ANSWER: C
3. The CPA firm of Knox and Knox has been subpoenaed to testify
and produce its correspondence and workpapers in connection
with a lawsuit brought by a third party against one of their
clients. Knox considers the subpoenaed documents to be
privileged communication and therefore seeks to avoid
admission of such evidence in the lawsuit. Which of the
following is correct?
a. Federal law recognizes such a privilege if the
accountant is a Certified Public Accountant.
b. The privilege is available regarding the workpapers
since the CPA is deemed to own them.
c. The privileged communication rule as it applies to a
CPA/client relationship is the same as that of
attorney-client.
d. In the absence of a specific statutory provision, the
law does not recognize the existence of the privileged
communication rule between a CPA and his client.
ANSWER: D
20
Chapter 3 Maintaining Professional Responsibility 21
ANSWER: B
ANSWER: A
a. Privity of contract.
b. Contributory liability.
c. Statutory liability.
d. Common law liability.
ANSWER: A
ANSWER: D
ANSWER: B
ANSWER: B
ANSWER: B
ANSWER: C
ANSWER: A
ANSWER: B
Scienter Reliance
a. No No
b. No Yes
c. Yes No
d. Yes Yes
ANSWER: A
15. The Rusch Factors and Rhode Island Hospital Trust cases
further defined the doctrine of privity by stating that
24 Chapter 3 Maintaining Professional Responsibility
ANSWER: B
ANSWER: A
ANSWER: D
ANSWER: B
ANSWER: D
ANSWER: A
ANSWER: B
26 Chapter 3 Maintaining Professional Responsibility
ANSWER: C
23. Mead Corp. orally engaged Dex & Co., CPAs, to audit its
financial statements. The management of Mead informed Dex
that it suspected that the accounts receivable were
materially overstated. Although the financial statements
audited by Dex did, in fact, include a materially
overstated accounts receivable balance, Dex issued an
unqualified opinion. Mead relied on the financial
statements in deciding to obtain a loan from City Bank to
expand its operations. City relied on the financial
statements in making the loan to Mead. As a result of the
overstated accounts receivable balance, Mead has defaulted
on the loan and has incurred a substantial loss. If Mead
sues Dex for negligence in failing to discover the
overstatement, Dex's best defense would be that
a. No engagement letter had been signed by Dex.
b. The audit was performed by Dex in accordance with
generally accepted auditing standards.
c. Dex was not in privity of contract with Mead.
d. Dex did not perform the audit recklessly or with an
intent to deceive.
ANSWER: B
ANSWER: B
Chapter 3 Maintaining Professional Responsibility 27
25. West & Co., CPAs, was engaged by Sand Corp. to audit its
financial statements. West issued an unqualified opinion on
Sand's financial statements. Sand has been accused of
making negligent misrepresentations in the financial
statements, which Reed relied upon when purchasing Sand
stock. West was not aware of the misrepresentations nor was
it negligent in performing the audit. If Reed sues West for
damages based upon Section 10(b) and rule 10b-5 of the
Securities Exchange Act of 1934, West will
a. Lose, because Reed relied upon the financial
statements.
b. Lose, because the statements contained negligent
misrepresentations.
c. Prevail, because some element of scienter must be
proved.
d. Prevail, because Reed was not in privity of contract
with West.
ANSWER: C
ANSWER: D
ANSWER: D
ANSWER: C
29. Donn & Co. is considering the sale of $11 million of its
common stock to the public in interstate commerce. In this
connection, Donn has been correctly advised that
registration of the securities with the SEC is
a. Not required if the states in which the securities are
to be sold have securities acts modeled after the
federal act and Donn files in those states.
b. Required in that it is necessary for the SEC to approve
the merits of the securities offered.
c. Not required if the securities are to be sold through a
registered brokerage firm.
d. Required and must include audited financial statements
as an integral part of its registration.
ANSWER: D
ANSWER: C
ANSWER: C
ANSWER: A
ANSWER: C
ANSWER: C
30 Chapter 3 Maintaining Professional Responsibility
COMPLETION:
40. Given the Securities Exchange Act of 1934 and the concept of
"integrated disclosure", information may be ____________ ___
in Form 10-K.
ANSWER: SCIENTER
ANSWER: STATUTORY
44. In the Ernst and Ernst v. Hochfelder case, the U.S. Supreme
Court held that auditors are not liable for under
Rule 10B-5 of the Securities Exchange Act of 1934, but only
for .
MATCHING:
SOLUTION:
1. b
2. e
3. h
4. c
5. f
6. d
7. a
8. g
ESSAY
Required:
a. Under what conditions, in common law may an auditor be
held liable to third parties for negligence?
SOLUTION:
SOLUTION:
SOLUTION: