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19 Cards in this Set
- Front
- Back
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Business failure
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business is unable to repay lenders or meet expectations ot its investorsbecuase of econ or business conditions like recession, bad mgmt or competiton
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Audit failure
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auditor issues an incorrect audit opinion because it failed to comply with requirements of auditing standards
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Audit risk
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possibility that the auditor concldes after conducting an adequate audit, that the FS were fairly stated when, in fact, they were materially misstated. This is unavoidable due to testing auditor does which aren't foolproof
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Prudent person concept
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auditor is not a guarantor of FS. he is to conduct audit w/ due care and be professional.
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Ordinary negligence
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what other auditors would do in that situation, and if you didn't you lacked reasonable care
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Gross negligence
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lack of even slight care, reckless behaviour
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Constructive fraud
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extreme or unusual negligence even though there was no intent to deceive or do hard. usually called recklessness
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Fraud
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misstatement is made and there is both the knowledge of its falsity and the intent to deceive
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Four major sources of auditor's legal liability
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1. to clients (client sues for not discovering material fraud)
2. to third parties under common law (bank sues auditor) 3. civil liability under federal securities law (stockholders sue for not discovering material misstmt) 4. criminal liability |
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Auditor's defense against clients suits (4)
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1. Lack of duty to perform (no impled or expressed contract)
2. Nonneglient Performance (auditor claims audit done in accordance w/ GAAS even if MMS found) 3. Contributory negligence (client's actions resulted in loss) 4. Absence of Causal Connection (no connection between auditor failure and damages suffered by client) |
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Ultramares doctrine
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common-law approach to 3rd party liability, est in 1931, in which ordinary negligence is insufficient for liability to 3rd parties because of a lack of privity of contract between 3rd party and auditor, unless the 3rd party is a primary beneficiary
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Restatement of Torts
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Approach followed by most states.
forseen users must be members of a reasonably limited and identifiable group of users who relied on the CPA's report |
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Foreseeable uer
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Only used in WI an Mississippi.
Broadest interpretation, any users that the auditor should have known would rely on the audit report have the same rights as those w/ privity of contract |
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Securities Act of 1933
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-Deals with the reporting requirements for companies issuing new securities.
-only parties who can recover from auditor's are original purchasers of securites |
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Rights of Third Parties under Securities Act of 1933
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1. any 3rd party who purchased securities can sue auditor for material misreps or ommissions in stmts
2. 3rd party users don't have burden of proof they relied on FS or auditor was neg or fraud. only have to prove FS contained MMS 3. auditor has to show a) adequate adit was conducted b) all or a portion of plaintiff's loss caused by some other factor |
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Securities Exchange Act of 1934 and Rule 10b-5
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-deals w/ audited financials of public companies (annual reports and 10-k's)
-Rule 10b-5 says accountants can be held liable if they intentionally or recklessly misrepresent info intended for third party use |
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Auditor defenses for 1934 Act
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1. nonnegligent performance
2. lack of duty to perform 3. absence of causal connection |
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AICPA's ways to reuce practioner's exposure to lawsuits (3)
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1. seek protection form nonmeritorious litigation
2. imporve auditing to better meet users' needs 3. educate users on limits of auditing |
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Protecting individual CPA's from legal liablity
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-deal only with clients w/ integrity
-hire qualified people and train em -follow standards -be independent -understand client's biz -perform quality audits -document work properly -obtain engagement letter and rep letter -maintain confidential relations -carry adequate insurance -seek legal counsel -choose organizational form with limited liability -exercise professional skepticism |
