AFM351 Midterm: Midterm review 4

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lilacmouse857

28 Jun 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM351

Professor

Linda Robinson

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Element of negligence

Application to auditor

There must be a duty of care

to plaintiff

JP had a duty of care to the shareholders and to any

third party that would reasonably be expected to rely on

the audited F/S (in this case, the bank)

Must be a breach of the duty

of care

JP did not conduct the audit in accordance with GAAS

There must be proof that

damage resulted

DMC would have to prove that they have suffered a loss.

In this case, DMC suffered a loss related to their 1million

Must be a reasonably close

connection between the

breach of duty and the

resulting damage

DMC would have to prove a reasonable connection

between JP 's negligence and their loss

DMC acquired its shares before JP issued their audit report; therefore, the fact that

JP were guilty of negligence doesn't support DMC's claim for damages. There is no

connection between JP's negligence and DMC's loss as their decision to purchase

shares was not made on the basis of relying on the audit report

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Document Summary

There must be a duty of care to plaintiff. Must be a breach of the duty of care. Must be a reasonably close connection between the breach of duty and the resulting damage. Jp had a duty of care to the shareholders and to any third party that would reasonably be expected to rely on the audited f/s (in this case, the bank) Jp did not conduct the audit in accordance with gaas. Dmc would have to prove that they have suffered a loss. In this case, dmc suffered a loss related to their 1million shares. Dmc would have to prove a reasonable connection between jp "s negligence and their loss b) Dmc acquired its shares before jp issued their audit report; therefore, the fact that. Jp were guilty of negligence doesn"t support dmc"s claim for damages.

Related Questions

4â28. Multiple Choice Questions
Select the best answer for each of the following questions and explain the reasons for your
choice.
a. If a CPA performs an audit recklessly, the CPA will be liable to third parties who were
unknown and not foreseeable to the CPA for:
(1) Strict liability for all damages incurred.
(2) Gross negligence.

(3) Either ordinary or gross negligence.
(4) Breach of contract.
b. Which of the following approaches to auditorsâ liability is least desirable from the CPAâs
perspective?
(1) The Ultramares approach.
(2) The Rosenblum approach.
(3) The Restatement of Torts approach.
(4) The Foreseen User approach.
c. In cases of breach of contract, plaintiffs generally have to prove all of the following,
except:
(1) The CPAs had a duty.
(2) The CPAs made a false statement.
(3) The client incurred losses related to the CPAsâ performance.
(4) The CPAs breached their duty.
d. If the CPAs provided negligent tax advice to a public company, the client would bring suit
under:
(1) The Securities Act of 1933.
(2) The Securities Exchange Act of 1934.
(3) The federal income tax law.
(4) Common law.
e. Which of the following cases reaffi rmed the principles in the Ultramares case?
(1) Credit Alliance Corp. v. Arthur Andersen & Co.
(2) Rosenblum v. Adler.
(3) Ernst & Ernst v. Hochfelder.
(4) Escott v. BarChris Construction Corporation.
f. Under common law, the CPAs who were negligent may mitigate some damages to a client
by proving:
(1) Contributory negligence.
(2) The CPAsâ fee was not material.
(3) The CPAs were not competent to accept the engagement.
(4) The CPAsâ negligence was caused by the fact that they had too much work.
g. Under the Securities and Exchange Act of 1934, auditors and other defendants are faced
with:
(1) Joint liability.
(2) Joint and several liability.
(3) Proportionate liability.
(4) Limited liability.
h. A CPA issued an unqualifi ed opinion on the fi nancial statements of a company that
sold common stock in a public offering subject to the Securities Act of 1933. Based on
a misstatement in the fi nancial statements, the CPA is being sued by an investor who
purchased shares of this public offering. Which of the following represents a viable
defense?
(1) The investor has not proved fraud or negligence by the CPA.
(2) The investor did not actually rely upon the false statement.
(3) The CPA detected the false statement after the audit date.
(4) The false statement is immaterial in the overall context of the fi nancial statements.
i. Which of the following elements is most frequently necessary to hold a CPA liable to a
client?
(1) Acted with scienter or guilty knowledge.
(2) Was not independent of the client.
(3) Failed to exercise due care.
(4) Did not use an engagement letter.

j. Which statement best expresses the factors that purchasers of securities registered under
the Securities Act of 1933 need to prove to recover losses from the auditors?
(1) The purchasers of securities must prove ordinary negligence by the auditors and reliance
on the audited fi nancial statements.
(2) The purchasers of securities must prove that the fi nancial statements were misleading
and that they relied on them to purchase the securities.
(3) The purchasers of securities must prove that the fi nancial statements were misleading;
then, the burden of proof is shifted to the auditors to show that the audit was
performed with âdue diligence.â
(4) The purchasers of securities must prove that the fi nancial statements were misleading
and the auditors were negligent.
k. The most signifi cant result of the Continental Vending case was that it:
(1) Created a more general awareness of the possibility of auditor criminal prosecution.
(2) Extended the auditorâs responsibility to all information included in registration
statements.
(3) Defi ned the CPAâs responsibilities for unaudited fi nancial statements.
(4) Established a precedent for auditors being held liable to third parties under common
law for ordinary negligence.
l. The 1136 Tenantsâ case was important because of its emphasis upon the legal liability of
the CPA when associated with:
(1) A review of annual statements.
(2) Unaudited fi nancial statements.
(3) An audit resulting in a disclaimer of opinion.
(4) Letters for underwriters.

pucebuffalo725

QUESTION 32

What did the old tort theorists conclude was the overriding question that the âold lawâ asked, in accord with their assumptions regarding it?

		How did one know when a customer must be identified as the recipient of the costs?
		How did the parties agree to allocate the costs of the accident?
		How would a party know when it would have to pay uncovered liabilities?
		How would a party know in what cases it was supposed to insure itself?

0.5 points

QUESTION 33

Huber discusses âthe Founders,â meaning:

		The original theorists of ecology
		The Founding Fathers
		The founders of modern tort law
		The first moral theorists

0.5 points

QUESTION 34

A crucial case for Huber is the defective Shopsmith in:

		Posner
		Greeman
		Prosser
		Calabresi

0.5 points

QUESTION 35

Why does Dowie think that Fordâs cost-benefit analysis is a moral problem?

		It places a dollar value on human life.
		It is dishonest and includes lies about the Pinto's safety.
		It shows that Ford made the Pinto unsafe on purpose.
		Dowie doesn't actually think that Ford was morally wrong.

0.5 points

QUESTION 36

Werhaneâs main point about the Pinto case is that:

		Ford was completely innocent of wrongdoing.
		A powerful narrative like Dowieâs article can bring the truth to a wider audience.
		Ford was completely responsible for the deaths caused by Pintos.
		A powerful narrative like Dowieâs article can skew our perception of the facts.

0.5 points

QUESTION 37

Thomson considers this rule: liability is to be shared between the actual harm-causer and anyone else who acted:

		Reasonably
		Justly
		Negligently
		Defensively

0.5 points

QUESTION 38

Thomson outlines three things a plaintiff must show in order to win his case. All of the following are discussed EXCEPT:

		The plantiff suffered from harm or loss.
		An act or omission of the defendant caused the harm or loss.
		The defendant is at fault in so acting or refraining from acting.
		None of the above.

0.5 points

QUESTION 39

Ciulla contends that the failure of leaders:

		Can be excused.
		Are often exaggerated.
		Seem more "extravagant" than those of nonleaders.
		Carry more "weight" than those of nonleaders.

0.5 points

QUESTION 40

Ciulla argues that American writers used to pay more attention to the moral virtues of leaders than to:

		Their chiseled features.
		Their personality traits.
		Their victories and successes.
		Their hopes and dreams.

0.5 points

QUESTION 41

Ciulla points out that while history portrays many leaders as winners, what is rarely questioned?

		The intentions of the leader.
		The ideological motives.
		The needs of the leader.
		All of the above.

0.5 points

QUESTION 42

Which is the area in which leaders must be more âmeticulous,â according to Ciulla, than ordinary people?

		Consistency
		Truthfulness
		Legal Record
		Personal Relationships

0.5 points

QUESTION 43

We often characterize leaders, in Ciullaâs view, according to what?

		Their ability to stay out of conflict.
		Their ability to benefit the most people.
		Their ability to lead.
		Their ability to bring about change.

0.5 points

QUESTION 44

Robinhoodism is what, for Ciulla?

		Stealing from the poor and giving to the middle class.
		Leading a brand of social "rebels" motivated by social privileges.
		A type of Machiavellianism.
		All of the above.

0.5 points

QUESTION 45

When Machiavelli uses the metaphor of âthe lion,â he is referring to what?

		Destroying the strategy of an opponent.
		Courage.
		Using fear as a weapon.
		Using love to motivate one's soldiers.

0.5 points

QUESTION 46

According to Machiavelli, when âa Prince is with his army, and has many soldiers under his command,â he needs a certain reputation to keep his command together. He needs a reputation for:

		Kindness
		"The Beast"
		Cruelty
		Morality

0.5 points

QUESTION 47

Is it better to be loved or feared, according to Machiavelli, and why?

		Feared, because that depends on the Prince and the people.
		Loved, because that depends on the Prince alone.
		Loved, because that depends on the Prince and the people.
		Feared, because that depends on the Prince alone.

0.5 points

QUESTION 48

Machiavelli insists that the Prince should âdo his utmost to escapeâ:

		Harm
		Power
		Enemies
		Hatred

0.5 points

QUESTION 49

Machiavelli would argue that for the Prince, lying is:

		Never expedient.
		Always wrong.
		Always good.
		Sometimes necessary.

0.5 points

QUESTION 50

Ludwig and Longenecker use the story of David and Bathsheba as a lesson in what, as it applies to being in a position of leadership?

		Success
		Chastity
		Temptation
		Delegation

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AFM351 Midterm: Midterm review 4

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