MULTIPLE CHOICE QUESTIONS FROM CPA EXAMINATIONS
5-14 (OBJECTIVES 5-4, 5-5) The following questions concern CPA firms’ liability under com-
mon law. Choose the best response.
a. In a common law action against an accountant, lack of privity is a viable defense if the
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 disregard
for the truth.
(3) is the accountant’s client.
(4) bases the action upon fraud.
b. The 1136 Tenants case was important chiefly because of its emphasis on the legal
liability of the CPA when associated with
(1) an SEC engagement.
(2) an audit resulting in a disclaimer of opinion.
(3) letters for underwriters.
(4) unaudited financial statements.
c. If a CPA recklessly departs from the standards of due care when conducting an audit,
the CPA will be liable to third parties who are unknown to the CPA based on
(1) negligence.
(2) gross negligence.
(3) strict liability.
(4) criminal deceit.
THE AUDITING PROFESSION
5-15 (OBJECTIVE 5-6) The following questions deal with liability under the 1933 and 1934
securities acts. Choose the best response.
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
unqualified 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
(1) the misstatements were caused primarily by MacLain.
(2) it can be shown that at least some of the investors did not actually read the audited
financial statements.
(3) it can prove due diligence in the audit of the financial statements of MacLain.
(4) MacLain had expressly assumed any liability in connection with the public
offering.
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 cus-
tomers. 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?
(1) Section 10b does not apply to them.
(2) They did not intentionally certify false financial statements.
(3) They were not in privity of contract with the creditors.
(4) Their engagement letter specifically disclaimed any liability to any party that
resulted from Markum’s fraudulent conduct.
c. A CPA audited the financial statements included in a registration statement for an is-
suance of securities to the public. If the financial statements contained an omission
that caused a purchaser of the securities to sustain damages, the
(1) Securities and Exchange Act of 1934 applies.
(2) purchaser must prove that (s)he was damaged by the omission, but not negli-
gence, privity or reliance.
(3) CPA will be liable only for gross negligence.
(4) due diligence defense is not available to the CPA
