TEST BANK For Louwers, Auditing and Assurance Services 9th
Edition, by Louwers, Bagley, Blay, Strawser, and Thibodeau
Which of the following statements are correct regarding economic losses and third-
party legal action against auditors? - ANSWER:Economic losses must have been
caused by reliance on financial statements not presented according to GAAP.
Auditors may be sued because they are the only party with resources can be made
under the _____________ ___________________ theory. - ANSWER:deep pockets
Difference in the diligence that users want auditors to use in detecting and reporting
fraud and the diligence that auditors are able to require to provide, cause a(n)
_________________ _____________ to occur. - ANSWER:expectation gap
Which of the following statements regarding common law are correct? - ANSWER:- It
uses legal precedence to identify fault and responsibility when there is no violation
of a written law.
- Jurisdiction is generally a state court in the state where the action occurred.
- Judges follow a sense of justice or morality when no legal precedent can be found.
In a(n) __________________ case, the primary basis for a decision is whether the
party's actions have violated the law as written in the code. - ANSWER:statutory
Auditor failure to complete the engagement by a specific deadline is -
ANSWER:breach of contract
Auditors may: - ANSWER:only be sued for economic losses from acts of fraud
committed by a client's employees that a GAAS audit should have identified.
Clients may seek legal action against auditors as a result of: - ANSWER:- substandard
performance
- breach of contract
Breach of contract actions are generally brought against auditors by: -
ANSWER:clients
When privily of contract exists, plaintiffs must demostrate: - ANSWER:- the loss was
caused by reliance on the financial statements
- they suffered an economic loss
- auditors failed to exercise the appropriate level of professional care
An unintentional breach of duty owed to another party because of a lack of
reasonable care is called ____________ ____________. - ANSWER:ordinary
negligence
, In certain jurisdictions auditors may claim that the client's actions were, in part,
responsible for the loss. This is called _____________ _______________. -
ANSWER:contributory negligence
The significance of Ultramares is that it established an obligation to those in privity
with auditors for gross negligence and fraud. - ANSWER:False
Auditors are liable if they are aware the auditors' opinion and financial statements
are to be used to some third party under the ______________ of _________
doctrine. - ANSWER:restatement of torts
Members of an unlimited class is another term for: - ANSWER:foreseeable parties
In order to avoid misunderstandings and disagreements: - ANSWER:- clients must
understand a compilation engagement does not involve gathering sufficient
appropriate evidence
- compilation and review engagements should include engagement letters
- it should be explained that a review service is less extensive than an audit.
The relationship of direct involvement between parties to a contract is known as
________ of contract. - ANSWER:privity
Clients or third-party users of financial statements are called the
_____________________ in legal action against auditors. - ANSWER:plaintiffs
To bring a suit against auditors under common law, third parties must demonstrate:
- ANSWER:- the loss was caused by reliance on the materially misstated financial
statements
- the financial statements contained a materiel misstatement
- they suffered an economic loss
Third parties known by name to the auditors for whose principal benefit the audit or
other accounting service is performed are called __________
____________________. - ANSWER:primary beneficiaries
Auditors defenses against third-party lawsuits do not include - ANSWER:contributory
negligence
The Ultramares opinion states that if auditors' failures to exercise the appropriate
level of professional care constituted gross negligence, grounds might exist for
concluding the auditors had engaged in _________ ________________. -
ANSWER:constructive fraud
Section 11 of the Securities Act treats all persona as: - ANSWER:reasonably
foreseeable
Edition, by Louwers, Bagley, Blay, Strawser, and Thibodeau
Which of the following statements are correct regarding economic losses and third-
party legal action against auditors? - ANSWER:Economic losses must have been
caused by reliance on financial statements not presented according to GAAP.
Auditors may be sued because they are the only party with resources can be made
under the _____________ ___________________ theory. - ANSWER:deep pockets
Difference in the diligence that users want auditors to use in detecting and reporting
fraud and the diligence that auditors are able to require to provide, cause a(n)
_________________ _____________ to occur. - ANSWER:expectation gap
Which of the following statements regarding common law are correct? - ANSWER:- It
uses legal precedence to identify fault and responsibility when there is no violation
of a written law.
- Jurisdiction is generally a state court in the state where the action occurred.
- Judges follow a sense of justice or morality when no legal precedent can be found.
In a(n) __________________ case, the primary basis for a decision is whether the
party's actions have violated the law as written in the code. - ANSWER:statutory
Auditor failure to complete the engagement by a specific deadline is -
ANSWER:breach of contract
Auditors may: - ANSWER:only be sued for economic losses from acts of fraud
committed by a client's employees that a GAAS audit should have identified.
Clients may seek legal action against auditors as a result of: - ANSWER:- substandard
performance
- breach of contract
Breach of contract actions are generally brought against auditors by: -
ANSWER:clients
When privily of contract exists, plaintiffs must demostrate: - ANSWER:- the loss was
caused by reliance on the financial statements
- they suffered an economic loss
- auditors failed to exercise the appropriate level of professional care
An unintentional breach of duty owed to another party because of a lack of
reasonable care is called ____________ ____________. - ANSWER:ordinary
negligence
, In certain jurisdictions auditors may claim that the client's actions were, in part,
responsible for the loss. This is called _____________ _______________. -
ANSWER:contributory negligence
The significance of Ultramares is that it established an obligation to those in privity
with auditors for gross negligence and fraud. - ANSWER:False
Auditors are liable if they are aware the auditors' opinion and financial statements
are to be used to some third party under the ______________ of _________
doctrine. - ANSWER:restatement of torts
Members of an unlimited class is another term for: - ANSWER:foreseeable parties
In order to avoid misunderstandings and disagreements: - ANSWER:- clients must
understand a compilation engagement does not involve gathering sufficient
appropriate evidence
- compilation and review engagements should include engagement letters
- it should be explained that a review service is less extensive than an audit.
The relationship of direct involvement between parties to a contract is known as
________ of contract. - ANSWER:privity
Clients or third-party users of financial statements are called the
_____________________ in legal action against auditors. - ANSWER:plaintiffs
To bring a suit against auditors under common law, third parties must demonstrate:
- ANSWER:- the loss was caused by reliance on the materially misstated financial
statements
- the financial statements contained a materiel misstatement
- they suffered an economic loss
Third parties known by name to the auditors for whose principal benefit the audit or
other accounting service is performed are called __________
____________________. - ANSWER:primary beneficiaries
Auditors defenses against third-party lawsuits do not include - ANSWER:contributory
negligence
The Ultramares opinion states that if auditors' failures to exercise the appropriate
level of professional care constituted gross negligence, grounds might exist for
concluding the auditors had engaged in _________ ________________. -
ANSWER:constructive fraud
Section 11 of the Securities Act treats all persona as: - ANSWER:reasonably
foreseeable
