Chapter 5 Legal Liability

17) A
third-party beneficiary is one which:
A) has failed to
establish legal standing before the court.
B) does not have
privity of contract and is unknown to the contracting parties.
C) does not have
privity of contract, but is known to the contracting parties and intended to
benefit under the contract.
D) may establish
legal standing before the court after a contract has been consummated.

18) If the CPA
negligently failed to properly prepare and file a client’s tax return, the CPA
may be liable for:
A) the penalties
the client owes the IRS.
B) the penalties
and interest the client owes.
C) the penalties
and interest the client owes, plus the tax preparation fee the CPA charged.
D) the penalties
and interest, the tax preparation fee, and the amount of tax that was
underpaid.

19) Constructive
fraud:
A) is also known
as recklessness.
B) requires an
intent to deceive.
C) involves
collusion with the client.
D) is also known
as breach of contract.

20) Which of the
following statements is true?
A)

Gross
negligence may constitute constructive fraud

Fraud requires
the intent to deceive

All fraud
should be detected during audit

Yes

Yes

No

B)

Gross
negligence may constitute constructive fraud

Fraud requires
the intent to deceive

All fraud
should be detected during audit

No

Yes

No

C)

Gross
negligence may constitute constructive fraud

Fraud requires
the intent to deceive

All fraud
should be detected during audit

Yes

No

Yes

D)

Gross
negligence may constitute constructive fraud

Fraud requires
the intent to deceive

All fraud
should be detected during audit

No

No

No

21) The laws
that have been developed through court decisions are called:
A) common laws.
B) criminal
laws.
C) statutory
laws.
D) civil laws.

22)
Gregory & Hedrick, a medium-sized CPA firm, employed Elise as a staff
accountant. Elise was negligent while auditing several of the firm’s clients.
Under these circumstances, which of the following statements is true?
A)
Elise would have no personal liability for negligence.
B)
Gregory & Hedrick is not liable for Elise’s negligence because CPAs are
generally considered to be independent contractors.
C)
Gregory & Hedrick would not be liable for Elise’s negligence if Elise
disobeyed specific instructions in the performance of the audits.
D)
Gregory & Hedrick can recover against its insurer on its malpractice policy
even if one of the partners was also negligent in reviewing Elise’s work.

23)
The legal term for when an auditor issues an audit opinion, knowing that an
adequate audit was not performed is a:
A)
breach of contract.
B)
tort action for negligence.
C)
constructive fraud.
D)
fraud.