Sample Questions and Answers
What is the primary source of legal liability for auditors?
Breach of contract
B. Breach of fiduciary duty
C. Negligence
D. Fraud
Answer: C. Negligence
Which of the following can a third party sue an auditor for?
Breach of contract
B. Fraud
C. Negligence
D. All of the above
Answer: D. All of the above
Which of the following must a plaintiff prove to hold an auditor liable for negligence?
Duty, breach, causation, and damages
B. Duty, breach, and fraud
C. Causation and damages
D. None of the above
Answer: A. Duty, breach, causation, and damages
What is the auditor’s primary defense against claims of negligence?
Lack of causation
B. Failure to disclose financial statements
C. Lack of duty to the plaintiff
D. Breach of contract
Answer: A. Lack of causation
Under which condition can an auditor be held liable to third parties under common law?
If the auditor is grossly negligent
B. If the auditor knowingly fails to detect fraud
C. If the auditor breaches a contractual duty
D. If the auditor fails to perform according to generally accepted auditing standards (GAAS)
Answer: A. If the auditor is grossly negligent
Which of the following is NOT a common defense used by auditors in legal liability cases?
Contributory negligence
B. Lack of proximate cause
C. Client misrepresentation
D. Lack of damages
Answer: C. Client misrepresentation
Which entity is responsible for setting the professional standards governing the conduct of auditors?
SEC
B. AICPA
C. IRS
D. PCAOB
Answer: B. AICPA
Which of the following is NOT a major source of auditor legal liability?
Breach of contract
B. Breach of confidentiality
C. Defamation
D. Violation of Securities Exchange Act
Answer: B. Breach of confidentiality
In which of the following situations would an auditor most likely be held liable to a third party under common law?
The auditor’s work is reviewed by a regulatory agency
B. The auditor provides a clean opinion on financial statements that are materially misstated
C. The auditor fails to detect fraud despite following standard procedures
D. The auditor is negligent in reviewing financial reports
Answer: B. The auditor provides a clean opinion on financial statements that are materially misstated
Under the Sarbanes-Oxley Act, what is the auditor’s responsibility regarding fraud detection?
Only to report fraud when it is detected
B. To conduct an audit designed to detect fraud
C. To report fraud only to senior management
D. To assess fraud risk but not to detect fraud
Answer: B. To conduct an audit designed to detect fraud
Which of the following is true regarding auditor liability under statutory law?
Statutory law creates a lower standard of care for auditors
B. Statutory law provides legal protection against negligence claims
C. Statutory law can provide remedies for fraud and negligent misrepresentation
D. Statutory law only applies to auditors of publicly traded companies
Answer: C. Statutory law can provide remedies for fraud and negligent misrepresentation
What does the “ultramares doctrine” refer to in auditor liability?
Auditor liability to all third parties for negligence
B. Auditor liability to clients only for contract breaches
C. Auditor liability to third parties who can prove they relied on the audit
D. Auditor liability in cases of securities fraud only
Answer: C. Auditor liability to third parties who can prove they relied on the audit
What is the purpose of “audit documentation” in terms of legal liability?
To provide evidence of compliance with auditing standards
B. To defend against claims of negligence
C. To demonstrate the auditor’s independence
D. To identify areas where fraud has occurred
Answer: B. To defend against claims of negligence
In which case can an auditor be held liable for defamation?
If an auditor publishes false statements about a company
B. If an auditor fails to report on financial misstatements
C. If an auditor omits material information in an audit report
D. If an auditor is involved in a contract dispute
Answer: A. If an auditor publishes false statements about a company
Which of the following is the most important factor in determining whether an auditor is liable to a third party under negligence?
The auditor’s knowledge of the third party
B. Whether the auditor is independent
C. The nature of the auditor’s relationship to the client
D. Whether the third party relied on the audit report
Answer: D. Whether the third party relied on the audit report
Under which law are auditors required to establish procedures for identifying and reporting fraud risks?
Federal Securities Act
B. The Sarbanes-Oxley Act
C. The Dodd-Frank Act
D. The Financial Reporting Act
Answer: B. The Sarbanes-Oxley Act
What is the “privity of contract” rule in legal liability?
Auditors can be held liable only to the parties with whom they have a contract
B. Auditors are liable to all third parties who use their financial statements
C. Auditors must provide written agreements with all clients
D. Auditors are not liable under common law
Answer: A. Auditors can be held liable only to the parties with whom they have a contract
In an auditor’s defense against negligence, what is “contributory negligence”?
When the auditor’s negligence directly contributes to the plaintiff’s damages
B. When the plaintiff’s own negligence contributed to the damages
C. When the plaintiff cannot prove damages
D. When the plaintiff’s damages are unrelated to the auditor’s work
Answer: B. When the plaintiff’s own negligence contributed to the damages
How does the “fraud” defense work for auditors?
The auditor is liable if fraud is detected
B. Auditors are not liable for fraud if they were unaware of it
C. The auditor must always detect fraud
D. The auditor can avoid liability by reporting fraud to the authorities
Answer: B. Auditors are not liable for fraud if they were unaware of it
What is the standard of care required of an auditor?
Ordinary care
B. Professional care
C. Extraordinary care
D. Minimal care
Answer: B. Professional care
Which of the following is NOT an example of auditor negligence?
Failing to follow GAAS
B. Issuing an unqualified opinion on financial statements that are materially misstated
C. Providing an opinion based on incomplete information
D. Failing to detect fraud despite thorough auditing procedures
Answer: D. Failing to detect fraud despite thorough auditing procedures
What is the role of the PCAOB in auditing?
To define the liabilities of auditors
B. To regulate and inspect the audits of public companies
C. To offer legal protection to auditors
D. To approve auditing standards
Answer: B. To regulate and inspect the audits of public companies
What can a plaintiff claim under “proximate cause” in an auditor negligence case?
The auditor’s breach directly led to the plaintiff’s losses
B. The auditor’s actions had no direct impact on the plaintiff’s situation
C. The auditor is only responsible for reporting fraud
D. The auditor failed to follow industry standards
Answer: A. The auditor’s breach directly led to the plaintiff’s losses
Which law requires auditors to report fraudulent financial statements to authorities?
Securities Exchange Act of 1934
B. Sarbanes-Oxley Act
C. Dodd-Frank Act
D. Federal Trade Commission Act
Answer: B. Sarbanes-Oxley Act
Who is responsible for defining auditing standards?
SEC
B. AICPA
C. PCAOB
D. All of the above
Answer: D. All of the above
What is the “statute of limitations” in auditing?
The period during which an auditor can be sued for negligence
B. The period during which financial statements must be audited
C. The period during which audit procedures must be completed
D. The period during which auditors are protected from lawsuits
Answer: A. The period during which an auditor can be sued for negligence
How does the concept of “reasonable care” affect auditor liability?
Auditors must meet an average standard of care expected of them
B. Auditors must avoid any possibility of harm to clients
C. Auditors must meet the highest possible standard of care
D. Auditors are held to a minimal standard of care
Answer: A. Auditors must meet an average standard of care expected of them
Which of the following is true regarding an auditor’s liability for misstatements?
Auditors are liable for all misstatements, regardless of materiality
B. Auditors are only liable for material misstatements that affect financial statements
C. Auditors are not liable for misstatements if they are not intentional
D. Auditors cannot be held liable for misstatements under any circumstances
Answer: B. Auditors are only liable for material misstatements that affect financial statements
Which of the following is a key factor in determining the severity of an auditor’s negligence?
The auditor’s intent to deceive
B. The scope of the audit performed
C. Whether the client agrees with the audit findings
D. The financial condition of the audit client
Answer: B. The scope of the audit performed
What is the auditor’s liability under the “reasonable person” standard?
The auditor must perform the audit as an average professional would
B. The auditor must perform the audit with the highest degree of care possible
C. The auditor is not liable under this standard
D. The auditor must follow the client’s instructions regardless of standard procedures
Answer: A. The auditor must perform the audit as an average professional would
Which of the following is the primary concern for auditors regarding legal liability?
Protecting client confidentiality
B. Avoiding errors in financial reporting
C. Ensuring compliance with tax laws
D. Minimizing exposure to lawsuits
Answer: D. Minimizing exposure to lawsuits
Under the Securities Act of 1933, auditors can be held liable for:
False financial statements in registration statements
B. Failure to detect fraud
C. Negligence in audit procedures
D. All of the above
Answer: A. False financial statements in registration statements
What does the “reasonable care” defense allow an auditor to claim?
That they followed standard procedures
B. That they followed the client’s instructions
C. That they did not intend to cause harm
D. That they met the minimum required standards of care
Answer: D. That they met the minimum required standards of care
Which of the following parties has the authority to regulate the activities of public company auditors?
State boards of accountancy
B. The SEC
C. The IRS
D. The AICPA
Answer: B. The SEC
What does the term “audit risk” refer to in legal liability?
The risk of making a misstatement due to negligence
B. The likelihood of being sued for fraud
C. The risk that an auditor’s opinion will be incorrect due to an audit failure
D. The chance that an auditor will miss detecting fraud
Answer: C. The risk that an auditor’s opinion will be incorrect due to an audit failure
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