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25 Cards in this Set
- Front
- Back
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What does an auditor generally owe to third parties when performing an audit?
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The auditor generally owes a duty of care to third parties who are a part of a limited group i persons whose reliance is "foreseen" by the auditor
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What serves as a legal basis for action against auditors?
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The Securities act of 1933
The Securities and Exchange act of 1934 The Sarbanes-Oxley act |
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What do audit professionals have a responsibility to fulfill?
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They have a responsibility under common law to fulfill implied or expressed contracts with clients
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What are audit professional liable to their clinets for?
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They are liable for negligence and/or breach of contract should they fail to provide the service or not exercise due care in their performance
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What is a business failure?
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It occurs when a business is "unable to repay its lenders" or meet the expectations of its investors because of economic or business conditions. Business failures usually lead to lawsuits
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What is an audit failure?
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It occurs when the auditor issues an "incorrect audit" opinion because it failed to compy with the requirements of auditing standards.
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What is audit risk?
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Represents the possibility that the auditor concludes after conducting an adequate audit that the financial statements were fairly stated when, in fact, they were materially misstated
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What is the prudent person concept?
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The legal concept that a person has a duty to exercise reasonable care and diligence in the performance of obligations.
He/She undertakes for good fatih and integrity, but not for infallibility. |
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What are the four major sources of Auditor's legal liability?
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Liability to clients
Liability to third parties Federal securities laws Criminal Liability |
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What is the most common source of lawsuits against CPA's?
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Lawsuits from clients but usually for a small amounts of money
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What are the auditors defenses against client suits?
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1)Nonnegligent performance( most preferred defense)
2)Lack of duty to perform 3)Contributory negligence 4)Absence of causal connection |
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What does the ultrameres doctrine say?
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Althought the accountants may be negligent they are not liable to creditors who are not a primary beneficiary(known to the audtior before the audit)
Which makes ordinary negligence insufficient for liability to third parties because of the lack of privity of contract |
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What is privity of contract?
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the relationship that exists between two or more parties to an agreement
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What are the main cases that the Ultrameres doctirne applies to?
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Credit alliance v. AA & Co. --Upheld Privity, auditor must know and intend that the work product would be used by the third party for a specifice purpose
Restatement of Torts (Rusch v. Levin) Foreseen users must be identifiable group Foreseeable users-- Any reasonably foreseeable users have the same rights as those that have privity of contract |
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What is an accountants civil liability under the Securities act of 1933?
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This act deals only with the reporting requirements for companies issuing new securities and only original purchasers of securities can recover from auditors. Under this act an Accountant is Guilty until proven Innocent(Only act where the burden of proof is on the defendant)
Reports under this act begin with a letter |
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What is a registration date?
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The days between when an auditor leaves field work and completes the audit.
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What does IPO stand for?
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Initial Public Offering
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What is an accountants civil liability undre the Securities Exchange Act of 1934?
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Liability of auditors under this act often centers on the audited financial statements issued to the public in annual reprts or submitted to the SEC is a part of annual form 10-K reports
Reports under this act begin with a number Innocent until proven guilty under this act |
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What are the auditor defenses under the 1934 Act?
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The same three defenses are available under common law are available to auditors under this act, they are...
1) Lack of duty 2) Nonnegligent performance(conform to GAAS) 3) Absence of causal connection( no connection between loss and financial statements) |
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What are two SEC sanctions?
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Sec has the power in certain circumstances to sanction or suspend practitioners from doing audits for SEC companies
In recent years, the SEC has temporarily suspended a number of individual CPA's from doing any audits on SEC clients |
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What is said to be the preliminary Sarbanes-Oxley act on internal control?
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The Foreign Corrupt Practices act of 1977.
The act makes it illegal to offer a bribe to an official of a foreign country for the purpose of exerting influence and obtaining or retaining business Act also requires SEC registrants to meet recordkeeping requirements plus have an adequate system of internal control |
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What are some other provisions of Sarbanes-Oxley act in 2002?
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Act requires CEO and CFO to certify the annual and quarterly financial statements filed to the SEC
Management must report its assessment of effectiveness of internal control over financial reporting Auditor must provide an opinion on managements assessment |
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What is being done to reduce the threat of litigation towards the profession?
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Education of users
Lobby for changes in laws Oppose lawsuits Standard and rule setting Sanction members for improper conduct and performance |
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What can a CPA do to protect themselves against liability?
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Deal only with clients possessing integrity
Maintain independence Perform Quality Audits Understand the clients Business |
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Under the securities act of 1933, what is the only thing that they must prove in order to win a case?
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users must only prove that the audited financial statements contained a material misrepresentation or omission
Guilty Until proven innocent under this act Auditor has the burden of proof |
