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Exam 11: Liability of Accountants and Other Professionals

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Question 51

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[Travel Plans] Amina,a certified public accountant,is hired by Yuri to do an audit on his business.He tells her that the audit results will be used by him in an attempt to obtain a $10,000 loan,probably from Bank ABC.Later,however,Yuri changes his mind and uses the approved financial statements from Amina to get a loan for $100,000 from Bank XYZ.On the same day that she was hired by Yuri,Amina,who specializes in reviewing financial statements for companies seeking loans,was approached by Jonathan,who asked her to review his financial statements so that he could get a loan for $10,000 from an unspecified bank.Amina approved the statements,and he got a loan from Bank ABC.Additionally,Maggie requested that Amina review her financial statements so that she could get a loan of $25,000 from a rich uncle.Amina is a bit uneasy about Maggie because she believes that Maggie is somewhat untrustworthy.Therefore,Amina requires that Maggie agree in writing that the report will be transmitted only to the uncle,not to any other potential lenders.Amina approved the financial statements but,in fact,Maggie uses the approved statements to get a loan for$25,000 from Bank XYZ.During the time that she had set aside to audit and review the financial statements of Yuri,Jonathan,and Maggie,Amina was also preparing for an important trip.She was busy arranging transportation and accommodations for her stay.All of this negatively affected her work and she negligently approved all financial statements referenced.Unfortunately,Yuri,Jonathan,and Maggie ended up defaulting on the loans.The lenders sued Amina. -Under the Restatement Test,referenced in the text's discussion of the case Bily v.Arthur Young & Co. ,which of the following is true regarding whether Bank XYZ can recover against Amina based upon the loan to Yuri?

A) Bank XYZ will not be able to recover $100,000 from Amina because the transaction went from $10,000 to $100,000,increasing materially the audit risk.
B) Bank XYZ will be able to recover from Amina because there was privity of contract.
C) Bank XYZ will be able to recover from Amina only if they have been a client of hers in the past.
D) Bank XYZ will not be able to recover because it was not in privity with Amina.
E) Bank XYZ will not be able to recover because Amina did not know that Yuri planned to get a loan from Bank XYZ.

F) A) and E)
G) None of the above

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Question 52

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Under the Sarbanes-Oxley Act,what are the penalties for willful violation of the section requiring the retention of working papers?

A) Accountants may be fined but not imprisoned.
B) Accountants may be fined,imprisoned for up to five years,or both.
C) There are no penalties because the Sarbanes-Oxley Act does not require the retention of working papers.
D) Accountants may be fined,imprisoned for up to ten years,or both.
E) Accountants may be fined or imprisoned for up to ten years,but not both.

F) C) and D)
G) A) and B)

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Question 53

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A[n] ________ liability insurance policy can protect a company doing business in the cloud.

[Prenuptial Agreement] Norah performed accounting services for Joel's used car business.She had a contract with Joel to the effect that she would audit his books and financial statements for his own use,not for the purpose of obtaining loans.In auditing Joel's business,she developed various notes,calculations,memorandums,and other papers.Gloria,Joel's fiancé,approached Norah to inquire about Joel's business.Gloria and Norah had been friends for many years.Norah allowed Gloria to look at the various notes,calculations,and other papers resulting from her review of Joel's financial statements and other records.Gloria told Norah that she really needed to investigate Joel because they were thinking of getting married,and she believed he had a legal obligation to disclose the information to her because of negotiations involving a prenuptial agreement.Norah agreed and proceeded to discuss Joel's finances with Gloria,revealing all the information that Joel had disclosed to her.Gloria broke up with Joel,telling him that after what she discovered from Norah,she was concerned about Joel's finances.Joel was very angry with Norah and told her that she was unethical and had violated the accountant-client privilege. -The notes,calculations,memorandums,and similar documents that Norah developed in her review of Joel's financial statements are called which of the following?

The reasonably foreseeable users test holds an accountant liable to any third-party who was or should have been foreseen as a possible user of the accountant's work product and did,in fact,use and rely upon that work product for a proper business purpose.

Under the Restatement Test,referenced in the text's discussion of the case Bily v.Arthur Young & Co. ,which of the following is true regarding the action brought by Bank ABC against Amina based upon the loss of funds on Jonathan's loan?

If Andrew engaged in breach,he is not entitled to compensation for work completed.

When can an accountant be held liable to his or her client for fraud?

If Kayla is called to testify at trial,would she likely be required to reveal information about Carter's remarks at the baseball game?

In the Case Opener "WorldCom," the court ruled that the chairman of WorldCom's board of directors could have no personal liability for misrepresentations of the company's condition in filings with the Securities and Exchange Commission.

Which of the following is true regarding states adhering to the privity or near privity rule for third party liability of accountants?