Professional Documents
Culture Documents
ch03 - Maintaining Professional Responsibility - Regulation and Legal Liability
ch03 - Maintaining Professional Responsibility - Regulation and Legal Liability
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
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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
22 Chapter 3 Maintaining Professional
Responsibility
ANSWER: D
ANSWER: B
ANSWER: B
ANSWER: B
ANSWER: C
ANSWER: A
ANSWER: B
24 Chapter 3 Maintaining Professional
Responsibility
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
ANSWER: B
ANSWER: A
Chapter 3 Maintaining Professional Responsibility 25
ANSWER: D
ANSWER: B
ANSWER: D
ANSWER: A
ANSWER: B
22. Working papers prepared by a CPA in connection with an audit
engagement are owned by the CPA, subject to certain
limitations. The rationale for this rule is to
a. Protect the working papers from being subpoenaed.
b. Provide the basis for excluding admission of the
working papers as evidence because of the
privileged communication rule.
c. Provide the CPA with evidence and documentation which
may be helpful in the event of a lawsuit.
d. Establish a continuity of relationship with the client
whereby indiscriminate replacement of CPAs is
discouraged.
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
Chapter 3 Maintaining Professional Responsibility 27
ANSWER: B
ANSWER: B
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.
28 Chapter 3 Maintaining Professional
Responsibility
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
COMPLETION:
Chapter 3 Maintaining Professional Responsibility 31
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: