ACC 544 Quiz 2 “� Question 1 Mead Corp. orally engaged Dex& Co., CPAs, to audit its financial statements. The management of Mead informed Dex that it suspected that the accounts receivable were materially overstated. Although the financial statements audited by Dex did, in fact, include a materially overstated accounts receivable balance, Dex issued an unqualified opinion. Mead relied on the financial statements in deciding to obtain a loan from City Bank to expand its operations. City relied on the financial statements in making the loan to Mead. As a result of the overstated accounts receivable balance, Mead has defaulted on the loan and has incurred a substantial loss. If Mead sues Dex for negligence in failing to discover the overstatement, Dex’s best defense would be that “� Question 2 Doe and Co., CPAs, issued an unqualified opinion on the 2012 financial statements of Marx Corp. These financial statements were included in Marx’s annual report and Form 10K filed with the SEC. Doe did not detect material misstatements in the financial statements as a result of negligence in the performance of the audit. Based upon the financial statements, Fitch purchased stock in Marx. Shortly thereafter, Marx became insolvent, causing the price of the stock to decline drastically. Fitch has commenced legal action against Doe for damages based upon Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Doe’s best defense to such an action would be that “� Question 3 A CPA firm was negligent in the audit of financial statements contained in a Form 10-K filed with the SEC. If an injured third party decided to file suit against the CPA, it would most likely be filed under “� Question 4 Dexter and Co., CPAs, issued an unqualified opinion on the 2012 financial statements of Bart Corp. Late in 2010, Bart determined that its treasurer had embezzled over $1,000,000. Dexter was unaware of the embezzlement. Bart has decided to sue Dexter to recover the $1,000,000. Bart’s suit is based upon Dexter’s failure to discover the missing money while performing the audit. Which of the following is Dexter’s best defense? “� Question 5 Hugh, CPA, has developed an opinion for which tax avoidance is a significant purpose that is marketed to potential investors. According to Treasury Department Circular 230 “� Question 6 Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA who certifies financial statements included in a registration statement generally will not be liable to a purchaser of the security “� Question 7 Which of the following circumstances is a defense to an accountant’s liability under Section 11 of the Securities Act of 1933 for misstatements and omissions of material facts contained in a registration statement? “� Question 8 A CPA partnership may, without being lawfully subpoenaed or without the client’s consent, make client workpapers available to “� Question 9 An accounting firm was hired by a company to perform an audit. The company needed the audit report in order to obtain a loan from a bank. The bank lent $500,000 to the company based on the auditor’s report. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the accounting firm failed to discover a material overstatement of assets of the company. Which of the following statements is correct regarding a suit by the bank against the accounting firm? The bank “� Question 10 In accordance with the AICPA Statements on Standards for Tax Services, if after having provided tax advice to a client there are legislative changes which affect the advice provided, the CPA “� Question 11 Alex Stone, CPA, prepared Ray Pym’s 2012 federal income tax return. Pym advised Stone that he had paid doctors’ bills of $15,000 during 2012, when in fact Pym had paid only $3,000 of bills. Based on Pym’s representations, Stone properly computed the medical expense deduction, with consequent understatement of tax liability of more than $5,000. Pym’s total tax liability shown on the return was $40,000. Stone had no reason to doubt the accuracy of Pym’s figures, although Stone did not request documentation for the expenses claimed; but he was assured by Pym that sufficient corroborative evidence of these expenses existed. In connection with Stone’s preparation of Pym’s 2012 return, Stone is “� Question 12 The Ultramares decision is a leading case that helps define when a CPA is liable to different parties. If a CPA has committed negligence, under this decision the CPA is liable to which of the following parties? “� Question 13 Clark, a professional tax return preparer, prepared and signed a client’s 2012 federal income tax return that resulted in a $600 refund. Which one of the following statements is correct with regard to an Internal Revenue Code penalty Clark may be subject to for endorsing and cashing the client’s refund check? “� Question 14 Jay, CPA, gave an unqualified opinion on Nast Power Co.’s financial statements. Larkin bought Nast bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC included Nast’s financial statements. Larkin sued Jay for misstatements contained in the financial statements under the provisions of Section 11 of the Securities Act of 1933. To prevail, Larkin must prove “� Question 15 The Joint Ethics Enforcement Program involves joint enforcement of the ethics rules of
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