Aud15 PPT 04 Ge

Chapter
Chapter44
Legal
LegalLiability
Liability
Considerations
Considerationsforfor
Auditors
Auditors
Copyright © 2014 Pearson Education

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.
4-2
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.
4-3
Specify what constitutes criminal liability for
accountants.
Describe how the profession and individual
CPAs can reduce the threat of litigation.
4-4
1
Understand the litigious environment in which
CPAs practice.
4-5
Audit professionals have a
contractual responsibility with clients.
Auditors are liable for negligence.
The number of lawsuits and sizes of

awards remain high.
4-6
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
4-7
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
4-8
2
Explain why the failure of financial statement
users to differentiate among business failure,
audit failure, and audit risk has resulted in
lawsuits.
4-9
 Business failure
A business is unable to meet its

obligations or investor expectations due
to economic or business conditions.
4-10
 Audit failure
Auditor issues an incorrect opinion from

a failure to follow GAAS.
4-11
 Audit risk
The risk that the auditor fails to find a

material misstatement and issues an
unqualified opinion.
4-12
3
Use the primary legal concepts and terms
concerning accountants’ liability as a basis for
studying legal liability of auditors.
4-13
Prudent person concept
Liability for the acts of others
Lack of privileged communication
4-14
Terms related to negligence and fraud:
Ordinary negligence
Gross negligence
Constructive fraud
Fraud
4-15
Contract Law
Breach of Third party

contract beneficiary
4-16
Other terms:
 Common law
 Statutory law
 Joint and several liability
 Separate and proportionate liability
4-17
4
Describe accountants’ liability to clients and
related defenses.
4-18
4-19
The most common source of lawsuits
against CPAs is from clients.
4-20
Lack of duty to perform
Nonnegligent performance
Contributory negligence
Absence of causal connection
4-21
5
Describe accountants’ liability to third parties
under common law and related defenses.
4-22
Ultramares Foreseen
doctrine users
4-23
 Credit alliance
Restatement of torts
Foreseeable user
4-24
4-25
6
Describe accountants’ civil liability under the
federal securities lawsand related defenses.
4-26
The Securities Act imposes an
unusual burden on the auditor.
Section 11 of the 1933 act defines the

rights of third parties and auditors.
4-27
Auditor liability under this act often
centers on the audited financial statements
issued to the public in annual reports
4-28
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.
4-29
SEC and PCAOB can sanction or suspend
practitioners.
SEC has temporarily suspended a number of

individual CPAs from auditing SEC clients.
4-30
Bribing a foreign official for the purpose
of exerting business related influence
is illegal.
4-31
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.
4-32
7
Specify what constitutes criminal
liability for accountants.
4-33
4-34
This act makes it a felony to destroy
or create documents to impede or
obstruct a federal investigation.
4-35
4-36
8
Describe how the profession and individual
CPAs can reduce the threat of litigation.
4-37
 Seek protection from
nonmeritorious litigation
 Improve auditing to better meet

user’s needs
 Educate users about the limits of

auditing
4-38
 Standard and rule setting
 Oppose lawsuits
 Education of users
 Sanction members for improper conduct

and performance
 Lobby for changes in laws
4-39
Qualified
Honest Clients
Personnel
Follow
Maintain
Professional
Independence
Standards
4-40
 Deal only with clients possessing integrity
 Maintain independence
 Understand the client’s business
 Perform quality audits
 Document the work properly
 Exercise professional skepticism

4-41

Carry adequate insurance
Seek legal counsel
Choose a form of organization with limited liability
4-42
4-43 Copyright © 2014 Pearson Education
Copyright
All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
4-44

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Chapter

Copyright © 2014 Pearson Education

Auditors are liable for negligence.

The number of lawsuits and sizes of

Growing awareness by financial statement

A business is unable to meet its

Auditor issues an incorrect opinion from

The risk that the auditor fails to find a

Liability for the acts of others

Lack of privileged communication

Breach of Third party

 Joint and several liability

 Separate and proportionate liability

Absence of causal connection

Section 11 of the 1933 act defines the

“Scienter” states that auditors must have

SEC has temporarily suspended a number of

Management must report on the

Auditors must provide an opinion on

 Improve auditing to better meet

 Educate users about the limits of

 Sanction members for improper conduct

 Lobby for changes in laws

 Understand the client’s business

 Perform quality audits

 Document the work properly

 Exercise professional skepticism

Carry adequate insurance

Seek legal counsel

Choose a form of organization with limited liability

All rights reserved. No part of this publication may be reproduced,

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