1.For the following situations indicate whether a rule of the AICPA Code ofConduct applies; if yes, state which rule, whether the rule has been violated, and whyor why not.
(a) Walker, CPA, is purchasing a home and received a large mortgage, under normallending procedures, with a bank that became an audit client after the mortgagewas set up; the mortgage amount is material to him.
(b) Logan, CPA, accepted as an audit client a modeling agency that signs up and placesmodels primarily using Internet interactions. Logan has never audited a modeling agency before.
(c) Letchworth and Miller, a local CPA ?rm, advertised that its audits will always saveclients money because the increased ef?ciencies resulting from audit recommendations will be more than the audit fee.
(d) The ?rm of Masser&Masser disclosed con?dential client information during thecourse of its inspection by the PCAOB.
(e) Jiggs, CPA, always sets audit fees that are contingent on the number of hours ittakes to perform the audit.
(f) Srygley, CPA, pays an attorney, Bill Suttle, a "?nder's fee" if Suttle refers a company to him that becomes an audit client.
(g) Cutter and Gaspar, CPA, are having some cash shortages because they recentlyremodeled their of?ces. Consequently, they issued an unquali?ed ?nancial statement audit opinion as a result of an integrated audit, even though they concludedthat some of the accounting treatments were not GAAP. They were concerned thatif they issued anything other than an unquali?ed opinion they would lose theclient.
2.The situations that follow pertain to Rule 101 of the AICPA Code ofProfessional Conduct as it relates to family relationships. Indicate whether each situation violates the Code and which provisions apply.
(a) A staff accountant's mother retired from her position as controller for an auditclient. Upon retirement, she was awarded shares of stock, which increased herownership share to 5%, Her stock ownership is material to her net worth. Thestaff accountant participates as a member of this client company's audit team.
(b) A CPA manager is a member of the audit team of Hudson Motorworks, Inc. Acousin of the CPA's wife is Hudson's vice president and sales director. This cousinalso owns a very small proportion (less than 1%) of the shares of the company'sstock.
(c) A CPA manager has a sister who holds a 50% ownership interest in the CPA's auditclient. This investment is material to the sister's net worth.
(d) A partner was formerly a shareholder in a company, but upon receiving a requestfor proposal for the company's current-year audit engagement, the partner transferred all shares of stock to her dependent daughter.
(e) A CPA participates in the audit of a vacation resort complex. The CPA's parentsown a timeshare in this resort complex, which is material to their net worth.
(f) A partner's dependent parent has a minor (less than 5%) ownership interest inan audit client of the partner's ?rm. The audit is conducted by other CPAs in thepartner's of?ce, but the partner does not participate in this audit engagement.
(g) A CPA manager is married to the CEO of an audit client. The CPA is also a share-holder of this audit client company. The audit is performed by CPAs in the ?rm'ssouthside of?ce. The CPA manager works in the ?rm's northside of?ce and there-fore is unable to exercise any in?uence over the audit engagement.
3.If a plaintiff purchased securities and initiates a civil liability suit against a CPA, what must be proven under the 1933 and 1934 Securities Acts for the plaintiff to prevail? Place yes or no in the space provided for each of the following.
Section 11 10b-5
1933 Act 1934 Act
1. material misstatement in the financial statements _________ ________
2. a monetary loss occurred _________ ________
3. lack of due diligence by the CPA _________ ________
4. privity with the CPA _________ ________
5. reliance on the financial statements _________ ________
6. the CPA had scienter _________ ________
4.ill in the blank with the answer. Each answer in the list may be used more than once or not at all.
a. Separate and proportionate
b. Racketeer Influenced and Corrupt l. Punitive damages
Organization Act (RICO) m. Hochfelder
c. Foreign Corrupt Practices Act n. Ultramares
d. Fraud o. Privity
e. Negligence p. Nearprivity
f. Reasonable professional care q. Standing
g. Gross negligence r. Deposition
h. Securities Act of 1933 s. Constructive fraud
i. Compensatory damages t. Breach of contract
j. Damages u. Joint and severally
k. Criminal victim compensation v. Securities Exchange Act of 1934
_____1. A federal statute used for legal action related to the initial offering of securities to the public by a company.
_____2. Absence of the level of care that an auditor owes to another party that has privity with the auditor.
_____3. Prior to SOX, the first federal statute requiring companies to have a functioning internal control system.
_____4. The federal statute that does not require the plaintiff to prove that he or she relied on the financial statements to be able to obtain a judgment against the auditor.
_____5. A case that established that fraud on the part of the auditor is required for an injured party to collect damages under 10b-5 of the 1934 Act.
_____6. Cause of action which plaintiffs without privity have not been successful at using to obtain the remedy of specific performance.
_____7. A judgment for the return of the loss the plaintiff experienced.
_____8. Liability theory that is now used for federal civil cases against accountants and auditors based on the Private Securities Litigation Reform Act of 1995.
_____9. When a state law does not specify the concept of gross negligence, this is the legal concept that is likely used.
_____10. The motivation for a plaintiff to allege gross negligence.
_____11. Can result in treble damages.
_____12. Typically requires the auditor to commit fraud before there will be a finding and judgment against the auditor.
_____13. Often a part of the process of discovery
_____14. Requires that the offending party's behavior must have been intentional (scienter).