audit finance economic 15 Auditing And Assurance Services.ppt

audit finance materi

1. Copyright © 2014 Pearson Education
Chapter 4
Legal Liability
Considerations for
Auditors

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Understand the litigious environment in which
CPAs practice.
Explain why the failure of financial statement
users to differentiate among business failure,
audit failure, and audit risk has resulted in
lawsuits.
Use the primary legal concepts and terms
concerning accountants’ a basis for studying
legal liability of auditors.

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Describe accountants’ liability to clients and
related defenses.
Describe accountants’ liability to third parties
under common law and related defenses.
Describe accountants’ civil liability under the
federal securities laws and related defenses.

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Specify what constitutes criminal liability for
accountants.
Describe how the profession and individual
CPAs can reduce the threat of litigation.

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Understand the litigious environment in which
CPAs practice.
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Audit professionals have a
contractual responsibility with clients.
Auditors are liable for negligence.
The number of lawsuits and sizes of
awards remain high.

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Major contributors:
Growing awareness by financial statement
users
Increased consciousness of the SEC
Complexity in business drives complexity in
auditing and accounting functions
Litigious society

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Major contributors (cont.):
Global recession and tough economic times
Large civil court judgments against CPA firms
Willingness of CPA firms to settle out of court
Judges’ and jurors’ difficulty in understanding
technical accounting and auditing matters

9. Copyright © 2014 Pearson Education
Explain why the failure of financial statement
users to differentiate among business failure,
audit failure, and audit risk has resulted in
lawsuits.
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4-9

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Business failure
A business is unable to meet its
obligations or investor expectations due
to economic or business conditions.

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Audit failure
Auditor issues an incorrect opinion from
a failure to follow GAAS.

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Audit risk
The risk that the auditor fails to find a
material misstatement and issues an
unqualified opinion.

13. Copyright © 2014 Pearson Education
Use the primary legal concepts and terms
concerning accountants’ liability as a basis for
studying legal liability of auditors.
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4-13

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Prudent person concept
Liability for the acts of others
Lack of privileged communication

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Terms related to negligence and fraud:
Ordinary negligence
Gross negligence
Constructive fraud
Fraud

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Contract Law
Breach of
contract
Third party
beneficiary

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Other terms:
Common law
Statutory law
Joint and several liability
Separate and proportionate liability

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Describe accountants’ liability toclients and
related defenses.
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The most common source of lawsuits
against CPAs is from clients.

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Lack of duty to perform
Nonnegligent performance
Contributory negligence
Absence of causal connection

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Describe accountants’ liability tothird parties
under common law and related defenses.
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4-22

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Ultramares
doctrine
Foreseen
users

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Credit alliance
Restatement of torts
Foreseeable user

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26. Copyright © 2014 Pearson Education
Describe accountants’ civil liability under the
federal securities lawsand related defenses.
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The Securities Act imposes an
unusual burden on the auditor.
Section 11 of the 1933 act defines the
rights of third parties and auditors.

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Auditor liability under this act often
centers on the audited financial statements
issued to the public in annual reports

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Section 10 and rule 10b-5 are often called
the antifraud provisions of the 1934 act.
“Scienter” states that auditors must have
the knowledge and intent to deceive in
order to be liable for violation of
Rule 10b-5.

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SEC and PCAOB can sanction or suspend
practitioners.
SEC has temporarily suspended a number of
individual CPAs from auditing SEC clients.

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Bribing a foreign official for the purpose
of exerting business related influence
is illegal.

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CEO and CFO are required to certify
financial statements filed with the SEC.
Management must report on the
effectiveness of internal controls over
financial reporting.
Auditors must provide an opinion on
internal controls over financial reporting.

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Specify what constitutes criminal
liability for accountants.
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This act makes it a felony to destroy
or create documents to impede or
obstruct a federal investigation.

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Describe how the profession andindividual
CPAs can reduce the threat of litigation.
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Seek protection from
nonmeritorious litigation
Improve auditing to better meet
user’s needs
Educate users about the limits of
auditing

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Standard and rule setting
Oppose lawsuits
Education of users
Sanction members for improper conduct
and performance
Lobby for changes in laws

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Honest Clients
Qualified
Personnel
Follow
Professional
Standards
Maintain
Independence

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Deal only with clients possessing integrity
Maintain independence
Understand the client’s business
Perform quality audits
Document the work properly
Exercise professional skepticism

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
Carry adequate insurance
Seek legal counsel
Choose a form of organization with limited liability

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