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AUDIT THEORY: Legal Liability quiz
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Chapter 5: Legal Liability questions with answers from Auditing and Assurance Services book by Alvin Arens 15th Edition.
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1CHAPTER 5
MULTIPLE CHOICE QUESTIONS
1. While performing services for their clients, professionals
have a duty to provide a level of care which is
A. Free from judgement errors
B. Superior
C. Greater than average
D. Reasonable
2. The number of lawsuits and size of awards to plaintiffs has
dramatically increased in the recent past. Which of the
following is likely not a reason for this trend?
A. Increased awareness of the CPA’s responsibilities with
respect to financial statements.
B. Many CPA firms are unwilling to settle legal problems out
of court
C. Many view CPA firms as having deep pockets
D. Accounting standards are more complex than ever before.
3. Which of the following may give rise to a business failure?
A. An erroneous audit opinion is issued.
B. Management may make a series of poor decisions
C. Auditors may fail to uncover management fraud
D. Poorly trained auditors may perform a company’s audit.
4. A ________ failure is said to have occurred when the auditor
issues an erroneous opinion as the result of an underlying
failure to comply with the requirements of generally
accepted auditing standards.
A. Business failure
B. Audit failure
C. Audit risk
D. All of the above
, 2
5. The standard of due care to which the auditor is expected to
adhere is referred to as the
A. Prudent person concept
B. Common law doctrine
C. Due care concept
D. None of the above
6. Auditors are not liable to their clients for
A. Errors of judgment
B. Negligence
C. Bad Faith
D. Dishonesty
7. Under the laws of agency, partners of a CPA firm may be
liable for the work of others on whom they rely. This would
not include
A. Employees of the CPA firm.
B. Employees of the audit client
C. Other CPA firms engaged to do part of the audit work
D. Specialists called upon to provide technical information to
the CPA firm.
8. “Absence of reasonable care that can be expected of a
person in a set of circumstances” is the definition of
A. Ordinary negligence
B. Gross negligence
C. Constructive fraud
D. Fraud
9. An example of a breach of contract would be
, 3
A. A CPA firm’s failure to deliver a tax return on the agreed-
upon date because the firm had a backlog of other work
which was more lucrative.
B. A bank’s claim that an auditor had a duty to uncover
material errors in financial statements that had been
relied on in making a loan.
C. An auditor’s refusal to return client’s general ledger book
until client paid last year’s audit fees.
D. An auditor’s failure to complete the audit by the agreed-
upon data because client’s financial records had been
confiscated by the Internal Revenue Service.
10. Privity of contract exists between
A. Auditor and client
B. Auditor and third parties
C. Auditor and the Securities and Exchange Commission
D. All three above
11. Audit contracts
A. May be either oral or written
B. Must be written
C. Must be written and notarized
D. Must be written if the client is regulated by the Securities
and Exchange Commission
12. An individual who is not party to the contract between CPA
and client, but who is known by both and is intended to
receive certain benefits from
A. A third party
B. A common law inheritor
C. A tort
D. A third-party beneficiary
, 4
13. Laws that have been developed through court decisions
rather than by passage through legislative bodies are
A. Statutory law
B. Judicial law
C. Federal Law
D. Common law
14. Laws that have been passed through state legislatures are
A. Statutory law
B. Judicial law
C. Federal law
D. Common law
15. The assessment against a defendant of the full loss suffered
by a plaintiff regardless of the extent to which other parties
shared in the wrongdoing is called
A. Separate and proportionate liability
B. Shared liability
C. Unitary liability
D. Joint and several liability
16. The assessment against a defendant of that portion of the
damage caused by the defendant’s negligence is called
A. Separate and proportionate liability
B. Joint and several liability
C. Shared liability
D. Unitary liability
17. In third-party suits, which of the auditor’s defenses contends
lack of privity of contract?
A. Lack of duty
B. Non-negligent performance
C. Contributory negligence
D. Absence of causal connections
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