Name : Alma Hapsari Fiqo Uli

NIM : 01017210057
Session : Week 5 – Chapter 5 (Legal Liability)

Multiple Choice Questions

5-14 (Objective 5-4, 5-5)
a. In a common law action against an accountant, lack of privity is a viable defense if the
plaintiff
Answer: (1) is the client's creditor who sues the accountant for negligence.

b. The 1136 Tenants case was important chiefly because of its emphasis on the legal
liability of the CPA when associated with
Answer: (4) unaudited financial statements.

c. DMO Enterprises, Inc., engaged the accounting firm of Martin, Seals, & Anderson to
perform its annual audit. The firm performed the audit in a competent, nonnegligent
manner and billed DMO for $48,000, the agreed fee. Shortly after delivery of the
audited financial statements, Hightower, the assistant controller, disappeared, taking
with him $82,000 of DMO's funds. It was then discovered that Hightower had been
engaged in a highly sophisticated, novel defalcation scheme during the past year. He
had previously embezzled $105,000 of DMO funds. DMO has refused to pay the
accounting firm's fee and is seeking to recover the $187,000 that was stolen by
Hightower. Which of the following is most likely true?
Answer: (3) The accountants are entitled to collect their fee and are not liable for
$187,000.

5-15 (Objective 5-6)

a. Major, Major & Sharpe, CPAs, are the auditors of MacLain Technologies. In
connection with the public offering of $10 million of MacLain securities, Major
expressed an unmodified opinion as to the financial statements. Subsequent to the
offering, certain misstatements were revealed. Major has been sued by the purchasers
of the stock offered pursuant to the registration statement that included the financial
statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major
will be able to avoid liability if
Answer: (3) it can prove due diligence in the audit of the financial statements of
MacLain.

b. Donalds & Company, CPAs, audited the financial statements included in the annual
report submitted by Markum Securities, Inc., to the SEC. The audit was improper in
several respects. Markum is now insolvent and unable to satisfy the claims of its
customers. The customers have instituted legal action against Donalds based on Section
 10b and Rule 10b-5 of the Securities Exchange Act of 1934. Which of the following is
likely to be Donalds' best defense?
Answer: (2) They did not intentionally certify false financial statements.

c. Which is the true statement concerning an auditor's statutory legal liability?

Answer: (4) The auditor has a greater burden of defense under the Securities Act of
1933 than the Securities Exchange Act of 1934.

Discussion Questions and Problems

5-18 (Objective 5-3, 5-7)
1. Kajari is the audit partner of the team auditing MircaleDrug PLC. Kajari followed
religiously the British auditing standards when performing the audit and issued an
unmodified opinion. As all of the audit team members were all accountants, they did
not realize a material misstatement pertaining the drug contraindications of their cancer
drug sold in Indonesia.
Answer:
Ordinary Negligence, auditor had followed the auditing standard while performing the
audit of client which didn’t reveal any misstatement

2. Chong would normally allocate five days for the audit of HoHo Transport Sdn Bhd.
With the floods at the client’s place, he had to reduce the numbers of samples to be
taken for the audit this year to meet the client’s place, he had to reduce the numbers of
samples to be taken for the audit this year to meet the client’s dateline. Chong issued
an unmodified opinion on the client’s financial statements.
Answer:
Gross Negligence, CPA had appointed college student to perform the audit that weren’t
experienced. There was also no guidance from CPA and hence is gross negligence

3. Edith was the audit senior auditing Robbie dan Kimmie Kennels Pte. Ltd. She was of
the opinion that the accounts payable of the company was true and fair to the
requirements of the Hong Kong Accounting Standards. However after the audit, one
creditor complained that the company paid HK$100 less on one invoice. The average
amount of account payables processed a month is HK10,000,000.
Answer:
Ordinary Negligence, auditor had followed the auditing standard while performing the
audit of client which didn’t reveal any misstatement.

4. Erica Gomez was the lead the auditor at Kiholand BV. During her audits she found a
set of documents that were incriminating to her husband. Her husband is a supplier to
the company. She burnt the documents
Answer:
Criminal Behaviour, the engagement partner had removed and discarded parts of the
working paper. This was done to remove evidences of the willful negligence on part of
the CPA
 5. Jayson Liem was the audit senior auditing Narnia Narratives PLC. Ten years ago he
bought a lot of stock in Narnia Narratives under a distant relative’s name. He was
disappointed with the performance of the stock at the stock market. During the audit,
he noticed that there was one major software development, which needed to be impaired
as there is no market for software designed for Windows XP. He knew that if the project
were impaired, the value of his investment would plummer. He decided not to impair
the impair the project.
Answer:
Constructive fraud. The reason is that the CPA and the client later were aware of the
misstatement which although was insignificant. They decided to account for the
misstatement in subsequent periods without disclosing the same stakeholders to avoid
litigations

5-20 (Objective 5-5)

Will the CPA firm be liable to the creditors who extended the money because of their reliance
on the erroneous financial statements if Newell Corporation should fail to pay them? Explain.
Answer:
Ya. Biasanya kantor akuntan publik tidak akan bertanggung jawab kepada pihak ketiga yang
tidak berurusan dengannya atau untuk keuntungan siapa pekerjaannya dilakukan. Satu
pengecualian penting untuk aturan ini adalah penipuan. Ketika laporan keuangan disiapkan
dengan adanya kecurangan, tanggung jawab dibebankan kepada semua pihak ketiga yang
mengandalkan informasi palsu yang terkandung di dalamnya. Penipuan dapat berupa aktual
atau konstruktif. Di sini, tidak ada penipuan aktual dari pihak Small atau firma karena tidak
ada kepalsuan yang disengaja dibuat dengan maksud yang diperlukan untuk menipu. Namun,
tampaknya penipuan konstruktif mungkin ada. Kecurangan konstruktif ditemukan di mana
kinerja auditor ditemukan sangat lalai. Artinya, auditor benar-benar tidak memiliki dasar atau
dasar yang sangat tipis untuk pendapatnya bahwa dia telah menunjukkan ketidakpedulian yang
sembrono terhadap kebenaran. Pengabaian Small terhadap prosedur audit standar tampaknya
menunjukkan kelalaian besar tersebut dan, oleh karena itu, perusahaan bertanggung jawab
kepada pihak ketiga yang mengandalkan laporan keuangan dan menderita kerugian sebagai
akibatnya.

5-23 (Objective 5-6)

a. Material misstatements were included in a filed document.
Answer:
a) Section 11 of the 1933 Securities Act.
b) Section 10(b) of the Securities Exchange Act.

b. A monetary loss occurred.

Answer:
a) Section 11 of the 1933 Securities Act.
b) Section 10(b) of the Securities Exchange Act.
c. Lack of due diligence by the CPA
Answer:
a) Section 11 of the 1933 Securities Act.
b) Section 10(b) of the Securities Exchange Act.

d. Privity with the CPA.

Answer:
a) Section 11 of the 1933 Securities Act.
b) Section 10(b) of the Securities Exchange Act.

e. Reliance on the document.

Answer:
Section 10(b) of the Securities Exchange Act.

f. The CPA had scienter.

Answer:
Section 10(b) of the Securities Exchange Act.