Principles of Auditing & Other Assurance Services Chapter 4 Exam Questions and Correct Answers
Latest Update 2024 ( Already Passed)
Breach of Contract - Answers Failure of one or bot parties to a contract to perform in accordance with
the contract's provisions. A public accounting firm might be sued for breach if the firm failed to perform
the engagement in accordance with the engagement letter. Negligence on the a part of the CPAs also
constitutes breach
Common Law - Answers Unwritten law that has developed through court decisions. IE the right to sue a
person for fraud is a common law right
Comparative Negligence - Answers a concept used by certain courts to allocate damages between
negligent parties based on the degree to which each party is at fault. The allocation of damages is
referred to as proportionate liability
Compilation of financial statements - Answers the preparation of financial statements by the CPAs based
on representations of management, with the expression of no assurance concerning the statements'
compliance with GAAP
Constructive fraud - Answers performing duties with such recklessness that persons believe the duties to
have been completed carefully are being misled. It differs from fraud in that constructive fraud does not
involve knowledge of misrepresentations within the financialstatemetns
Contributory Negligence - Answers Negligence on the part of the plaintiff that has contributed to his or
her having incurred a loss. May be used as a defense, because the court may limit or bar recovery by a
plaintiff whose own negligence contributed to the loss
Credit Alliance Corp. v. Arthur Andersen & Co - Answers A common law decision by the New York Court
of Appeals stating that auditors must demonstrate knowledge of reliance on the financial statements by
a third party for a particular purpose to be held liable for ordinary negligence to that third party.
Basically, this case upheld Ultramares v Touche & Co.
Defendent - Answers The party against which damages and suit are brought by the plaintiff
Due diligence - Answers a public accounting firm's contention that its audit work was adequate to
support its opinion on financial statements included in a registration statement filed with the SEC under
the Securities Act of 1933
Engagement Letter - Answers A written contract summarizing the contractual relationship between the
CPAs and the client. The engagement letter typically specifies the scope of professional services to be
rendered, expected completion dates and the basis for determination of the CPA's fees.
Ernst & Ernst v. Hochfelder - Answers A landmark case in which the US Supreme Court decided that
auditors could not be held liable under the SEC Act of 1934 for ordinary negligence
Latest Update 2024 ( Already Passed)
Breach of Contract - Answers Failure of one or bot parties to a contract to perform in accordance with
the contract's provisions. A public accounting firm might be sued for breach if the firm failed to perform
the engagement in accordance with the engagement letter. Negligence on the a part of the CPAs also
constitutes breach
Common Law - Answers Unwritten law that has developed through court decisions. IE the right to sue a
person for fraud is a common law right
Comparative Negligence - Answers a concept used by certain courts to allocate damages between
negligent parties based on the degree to which each party is at fault. The allocation of damages is
referred to as proportionate liability
Compilation of financial statements - Answers the preparation of financial statements by the CPAs based
on representations of management, with the expression of no assurance concerning the statements'
compliance with GAAP
Constructive fraud - Answers performing duties with such recklessness that persons believe the duties to
have been completed carefully are being misled. It differs from fraud in that constructive fraud does not
involve knowledge of misrepresentations within the financialstatemetns
Contributory Negligence - Answers Negligence on the part of the plaintiff that has contributed to his or
her having incurred a loss. May be used as a defense, because the court may limit or bar recovery by a
plaintiff whose own negligence contributed to the loss
Credit Alliance Corp. v. Arthur Andersen & Co - Answers A common law decision by the New York Court
of Appeals stating that auditors must demonstrate knowledge of reliance on the financial statements by
a third party for a particular purpose to be held liable for ordinary negligence to that third party.
Basically, this case upheld Ultramares v Touche & Co.
Defendent - Answers The party against which damages and suit are brought by the plaintiff
Due diligence - Answers a public accounting firm's contention that its audit work was adequate to
support its opinion on financial statements included in a registration statement filed with the SEC under
the Securities Act of 1933
Engagement Letter - Answers A written contract summarizing the contractual relationship between the
CPAs and the client. The engagement letter typically specifies the scope of professional services to be
rendered, expected completion dates and the basis for determination of the CPA's fees.
Ernst & Ernst v. Hochfelder - Answers A landmark case in which the US Supreme Court decided that
auditors could not be held liable under the SEC Act of 1934 for ordinary negligence
