Multiple Choice Questions
The following questions concern CPA firms' liability under common law. Choose the best response.
a. Sharp, CPA, was engaged by Peters & Sons, a partnership, to give an opinion on the financial statements that were to be submitted to several prospective partners as part of a planned expansion of the firm. Sharp's fee was fixed on a per diem basis. After a period of intensive work, Sharp completed about half of the necessary field work. Then, because of unanticipated demands on his time by other clients, Sharp was forced to abandon the work. The planned expansion of the firm failed to materialize because the prospective partners lost interest when the audit report was not promptly available. Sharp offered to complete the task at a later date. This offer was refused.
Peters & Sons suffered damages of $400,000 as a result. Under the circumstances, what is the probable outcome of a lawsuit between Sharp and Peters & Sons?
(1) Sharp will be compensated for the reasonable value of the services actually performed.
(2) Peters & Sons will recover damages for breach of contract.
(3) Peters & Sons will recover both punitive damages and damages for breach of contract.
(4) Neither Sharp nor Peters & Sons will recover against the other.
b. In a common law action against an accountant, lack of privity is a viable defense if the plaintiff
(1) Is the client's creditor who sues the accountant for negligence.
(2) Can prove the presence of gross negligence that amounts to a reckless disregard for the truth.
(3) Is the accountant's client.
(4) Bases the action upon fraud.
c. The 1136 Tenants case was important chiefly because of its emphasis on the legal liability of the CPA when associated with
(1) An SEC engagement.
(2) Unaudited financial statements.
(3) An audit resulting in a disclaimer of opinion.
(4) Letters for underwriters.