Chapter 4

I. Multiple choice

1. If a CBA recklessly departs the standards of due care when conducting an audit, she
or he will be liable to unknown third parties based on
A. Strict liability.
B. Gross negligence.
C. Negligence.
D. Breach of contract.

2. Which of the following elements, if present, would support a finding of constructive

fraud on the part of a CPA?
A. Gross negligence in applying auditing standards.
B. Ordinary negligence in applying financial reporting standards.
C. Identified third party users
D. Scienter

3. Under common law, which of the following statements most accurately reflects the
liability of a CPA who fraudulently gives an opinion on an audit of a client’s financial
statements?
A. The CPA is liable only to third parties in privity of contract with the CPA.
B. The CPA is liable only to known users of the financial statements.
C. The CPA probably is liable to any person who suffered a loss as a result of the
fraud.
D. The CPA probably is liable to the client even if the client was aware of the
fraud and did not rely on the opinion.

4. While performing services for their clients, professionals have always had a duty to
provide a level of care which is
A. Reasonable.
B. Greater than average.
C. Superior.
D. Guaranteed to be free from error.

5. In rare cases auditors have been held liable for criminal acts. A criminal conviction
against an auditor ca result only when it is demonstrated that the auditor
A. Was negligent.
B. Was grossly negligent.
C. Intended to deceive or harm others.
D. Caused a financial loss to an innocent third party.
II. True or false
1. When a business is unable to repay its lenders because of economic conditions, such as
recession, it suffers from business failure?
A. True.
B. False.

2. When the auditor issues an erroneous opinion as the result of an underlying failure to
comply with the requirements of auditing standards, it results in audit failure?
A. True.
B. False.

3. The auditor’s responsibility for failure to detect fraud arises whenever the amounts
involved are material?
A. True.
B. False. When such failure clearly results from failure to comply with auditing
standards.

4. The auditor is not liable to his client for negligence?

A. True.
B. False. Errors of judgment

5. The standard of due care to which the auditor is expected to be held is referred to as
the common law doctrine?
A. True.
B. False. Prudent person concept.