Question

Bailey CPA, audited Lincoln Corporation. The shareholders sued both Lincoln and Bailey for securities fraud under the Federal Securities Exchange Act of 1934. The court determined that there was securities fraud and that Lincoln was 80% at fault and Bailey was 20% at fault due to her negligence in the audit. Both Lincoln and Bailey are solvent and the damages were determined to be $2 million. What is the maximum liability of Bailey?

	A	$0
	B	$2,000,000
	C	$1,000,000
	D	$400,000

An unconditional responsibility to follow an AICPA professional standard exists when the professional standard uses the term(s):  

	Must	Should
A.	Yes	Yes
B.	Yes	No
C.	No	Yes
D.	No	No

	A	Option A
	B	Option B
	C	Option C
	D	Option D

Answer 1

1. D - $400,000

2. B - Must - Yes | Should - No

Unconditional requirements - Requirements an auditor must follow in all cases if the circumstances apply to the requirement. Auditing standards use the word “must” to indicate an unconditional requirement.

Presumptively mandatory requirements - Requirements an auditor must follow in all cases if the circumstances apply to the requirement, except in rare circumstances. Auditing standards use the word “should” to indicate a presumptively mandatory requirement