EBK AUDITING+ASSURANCE SERVICES
17th Edition
ISBN: 9780135171219
Author: ARENS
Publisher: PEARSON CO
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Chapter 5, Problem 16.3MCQ
To determine
Identify the correct option according to the statement given.
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In a common law action against an accountant, lack of privity is a viable defense ifthe plaintiff(1) is the client’s creditor who sues the accountant for negligence.(2) can prove the presence of gross negligence that amounts to a reckless disregardfor the truth.(3) is the accountant’s client.(4) bases the action upon fraud.
4)
Explain if, and why an accountant will be held liable to:
its client,
to 3rd party intended users of the financial statements and audits it prepares for its client, and
to reasonably foreseeable users of the work, it prepared for its client.
∙ Be sure to identify who reasonably foreseeable users would be and why the accountant is responsible to them in the absence of privity.
Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements?
A. The CPA is liable only to third parties in privity of contract with the CPA
B. The CPA is liable only to known users of the financial statements
C. The CPA probably is liable to any person who suffered a loss as a result of the fraud
D. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion
Chapter 5 Solutions
EBK AUDITING+ASSURANCE SERVICES
Ch. 5 - Prob. 1RQCh. 5 - Prob. 2RQCh. 5 - Prob. 3RQCh. 5 - Prob. 4RQCh. 5 - Prob. 5RQCh. 5 - Prob. 6RQCh. 5 - Prob. 7RQCh. 5 - Prob. 8RQCh. 5 - Prob. 9RQCh. 5 - Prob. 10RQ
Ch. 5 - What potential sanctions does the SEC have against...Ch. 5 - Prob. 12RQCh. 5 - Prob. 13RQCh. 5 - Prob. 14.1MCQCh. 5 - Prob. 14.2MCQCh. 5 - Prob. 14.3MCQCh. 5 - Prob. 15.1MCQCh. 5 - Prob. 15.2MCQCh. 5 - Prob. 15.3MCQCh. 5 - Prob. 16.1MCQCh. 5 - Prob. 16.2MCQCh. 5 - Prob. 16.3MCQCh. 5 - Prob. 17DQPCh. 5 - Prob. 18DQPCh. 5 - Prob. 19DQPCh. 5 - Prob. 20DQPCh. 5 - Prob. 21DQPCh. 5 - Prob. 22DQPCh. 5 - Prob. 23DQPCh. 5 - Prob. 24DQPCh. 5 - Prob. 27DQPCh. 5 - Prob. 28C
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- Auditors may be held liable to both their clients and third parties under common law. a. What must a client prove to recover its losses from the auditors under common law? b. In a court that adheres to the precedent set by the Ultramares v. Touche case, what must an ordinary third party prove to recover losses from the auditors under common lawarrow_forwardWhat does a third-party user of financial statements have to prove under common law in a suit against an auditor for the auditor's negligence?arrow_forwardWhat does a third-party user of financial statements have to prove under common law in a suit against an auditor for the auditor's negligence? Explain each item with an examplearrow_forward
- What types of actions may an auditor be liable to a client under common law? Why would the clients prefer to sue the auditor for tort action rather than a breach of contract?arrow_forwardA number of cases have considered the auditor’s liability in relation to persons other than the immediate client. Even so, the AWA case established that: Select one: a. Duty of care and skill means following the accounting standards b.auditors have a contractual duty to oversee and review the work of inexperienced audit staff c.Auditors are only liable for the proportion of damages attributable to their actions d.Auditors have a duty of care only to the shareholders.arrow_forwardIf either party fails to perform their contractual obligations according to the contract terms, it will usually result in a breach of contract. The scope and nature of an auditor's contractual obligation to a client ordinarily is established in the: Select one: a. Corporations Act 2001. b. Management letter. c. Client’s constitution. d. Engagement letter.arrow_forward
- Each of the following situations involves a possible violation ofthe AICPA Code of Professional Conduct. For each situation, state the applicable section ofthe rules of conduct and whether it is a violation.a. Emrich, CPA, provides tax services, management advisory services, and bookkeepingservices and also conducts audits for the same nonpublic client. Because the firm issmall, the same person often provides all the services.b. Franz Marteens is a CPA, but not a partner, with 3 years of professional experiencewith Roberts and Batchelor, CPAs. He owns 25 shares of stock in an audit client ofthe firm, but he does not take part in the audit of the client, and the amount of stockis not material in relation to his total wealth.c. A nonaudit client requests assistance of M. Wilkenson, CPA, in the installationof a local area network. Wilkenson had no experience in this type of work andno knowledge of the client’s computer system, so he obtained assistance from acomputer consultant. The…arrow_forwardWhich statement about the SEC independence rules on bookkeeping services is not accurate? a) Bookkeeping services are prohibited even if the client approves the books and records as the services are performed. b) Bookkeeping services are permitted if the individuals performing these services perform no other services. c) Bookkeeping services are prohibited in most circumstances under the SEC's independence rules. d) Bookkeeping services are prohibited even if the fees from these services are less than the audit fee.arrow_forwardThe Commissioner can force a taxpayer to produce his/its accounting records if the taxpayer refuses to provide the same during audit. A. True B. Falsearrow_forward
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