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Exam 33: Liability of Accountants and Other Professionals

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Question 21

True/False

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An accountant who performs an audit may be liable for failing to detect misconduct if a normal audit would have revealed it.

A) True
B) False

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Question 22

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Under the Sarbanes-Oxley Act, accountants must surrender possession of working papers relating to an audit or review to the party for whom the work was performed.

A) True
B) False

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Question 23

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An accountant is not required to discover every impropriety, defalcation, and fraud in a client's books.

Fact Pattern 33-1 ​Nelson, an accountant, enters into a contract to provide services to Operational Processes, Inc. (OPI) . Nelson does not finish the work within the contract's deadline. This causes OPI to fail to meet certain other deadlines owed to Prime Bank, which results in the firm's payment of penalties to the bank. -Refer to Fact Pattern 33–1. Nelson is

Beck is an accountant who prepares her clients' tax returns. Cole is not an accountant, but he also prepares tax returns for clients. Under the Internal Revenue Code, liability for preparing a false return may be imposed on​

Working papers are the documents through which a court orders an accountant to audit a public company.

In all states, communications between an accountant and his or her client are privileged.

In some states, in the absence of privity, a party cannot recover from an accountant for negligence.

Finola, a certified public accountant, provides accounting services to Global Trade Corporation. The services include preparing Global Trade's financial reports and issuing opinion letters based on the reports. In 2014, Global Trade falls into serious financial trouble, but neither Finola's reports nor her opinion letters indicate this situation. Relying on Finola's portrayal of Global Trade's financial situation, the firm borrows a large sum of money to build a new shipping facility. In lending Global Trade the money, Harbor City Bank relies on Finola's opinion letter. Finola is aware of this reliance. If Finola did not engage in intentional fraud but was negligent, what is her potential liability?​

Under the Sarbanes-Oxley Act, accountants need not retain working papers relating to an audit or review.

Odell, an accountant, prepares for Pronto Tacos Corporation a financial statement that omits a material fact. The financial statement is included in Pronto Tacos's registration statement, which Qiana reads. Qiana buys Pronto Tacos stock. Under Section 11 of the Securities Act of 1933, for Odell to be liable for the omission, Qiana must show that she​ ​

Cathy is an accountant with Discount Retail Corporation. Efrem buys Discount Retail stock and loses money on the investment. To recover from Cathy under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, Efrem must prove​

A professional can be liable for constructive fraud only if he or she acted with fraudulent intent.

An accountant's liability under the Securities Act of 1933 requires privity of contract with the purchaser of a security.

Ezra, an accountant, intentionally misstates a material fact to mislead Fruit Packing, Inc., a client. Fruit Packing justifiably relies on the misstatement to its detriment. Ezra is most likely liable for​

Diderot's accountant is Esteban and his attorney is Figaro. All states protect, as privileged information, Diderot's communications with​

Nguyen Imports, Inc., accuses Ogilvie, an accountant, of committing defalcation. This is​

Copper Piping Company's liabilities exceed its assets, but its books falsely reflect a positive net worth. Copper hires Dart & Dash, an accounting firm, to prepare a balance sheet, which is certified to show a net worth. Equity Bank relies on the balance sheet to make a loan to Copper. Copper defaults on the loan. Under the Ultramares rule, Dart & Dash is most likely not liable because the firm​

Hernando, an accountant, helps Industrial Equipment & Supplies Company prepare and file a false federal corporate income tax return. Under the Internal Revenue Code, this is​

Everett is an accountant whose clients include Finance & Capital, Inc. Under the Ultramares rule, if Everett is negligent in his work for Finance & Capital, he could be liable to Finance & Capital and