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81 Cards in this Set

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Unqualified opinion
Represents an auditor's finding that the company's financial statements fairly represent the company's financial position, the results of its operations, and the change in cash flows for the period then ended in conformity with GAAP.
Qualified opinion
States financial statements are fairly stated except for a departure from GAAP a change in accounting principles, or a material uncertainty. The exception, departure, or uncertainty is noted in the audit opinion.
Adverse opinion
Determines that the financial statements do not fairly represent the companys financial position, results of operations, or change in cash flows in conformity with GAAP. This type of opinion is usually issued when an auditor determines that a company has materially misstated certain items on financials.
Disclaimer of opinion
Expresses auditor's inability to draw a conclusion about the accuracy of the company's financial records. This opinion is generally issued when the auditor lacks sufficient info about the financial records to issue an overall opinion
Limited liability partnership
Most CPA's are organized as LLP's. In this form of partnership, all the partners are limited partners who lose only their capital contributions if the LLP fails. The limited partners are not personally responsible for the debts and obligations of the LLP. A LLP whose negligent or intentional conduct causes in jury is personally liable for their own conduct.
Engagement
a formal entrance into a contract between a client and an accountant
Breach of contract
terms of engagement are specified when an accountant and a client enter into a contract. An accountant who fails to perform may be sued for damages caused by the breach of contract. Generally courts consider damages to be the expenses the client incurs in securing another accountant to perform the needed services as well as any fines or penalties incurred by the client for missed deadlines, lost opportunities, and such.
Fraud
when an accountant has been found liable for actual or constructive fraud, the client may bring a civil lawsuit and recover any damages proximately caused by that fraud. Punitive damages may be awarded in cases of actual fraud.
Actual fraud
Intentional misrepresentation or omission of a material fact that is relied on by the client and causes the client damage. Such cases are rare.
Constructive fraud
Occurs when an accountant acts with "reckless disregard" for the truth or the consequences of his or her actions. This type of fraud is sometimes categorized as gross negligence
Negligence
Accountants owe a duty to use reasonable care, knowledge, skill, and judgment when providing auditing and other accounting services to a client. In other words, an accountant's actions are measured against those of a "reasonable accountant" in similar circumstances. The develpment of GAAP, GAAs and other uniform accounting standards has generally made this a national standard. An accountant who fails to meet this standard may be sued for negligence
Unaudited financial statements
Accountants can also be held liable for their negligence in preparing unaudited financial statements. If an audit turns up a suspicious transaction or entry, the accountant is under a duty to investigate it and inform the client of the results of the investigation.
Ultramares doctrine
A rule which says that an accountant is liable only for negligence to third parties who are in privity of contract or in privity-like relationship with the accountant. It provides a narrow standard for holding accountants liable to third parties for negligence.
When does privity of contract relationship occur?
When a client is employs an accountant to prepare financial statements to be used by a 3rd party. For example 1. client employs accountant to prepare audited financials for the client to obtain a bank loan. 2. The accountant is made aware of this special purpose, the accountant is liable for any damages incurred by the bank because of a negligently prepared report.
Section 522 of restatement of torts
A rule which says an accountant is liable only for negligence to third parties who are members of a limited class of intended users of the client's financial statements. It provides a broader standard for holding accountants liable than does the Ultramares doctrine.
How does Section 522 differ from ultramares
Under restatement liable for negligence to any memeber of liimted intended users for whose benefit the accountant has been employed to prepare the client's financial staements or to whom the accountant knows the client will supply copies of the financial statements. In other words, the accountant does not have to know the specific name of the third party.
Foreseeability standard
A rule which says that an accountant is liable for negligence to third parties who are foreseeable users of the client's financial statements. It provides the broadest standard of liability
What does liability depend on in the foreseeability standard
doesn't depend on accountant's knowledge of the identity of either user or intended user
Fraud
If an accountant engages in actual or constructive fraud, a third party who relies on the accountant's fraud and is injured thereby may bring a tort action against the accountant to recover damages. Salvo hires CPA to do the audit and the CPA falsifies the financial position of the company. Bank extends the loan to Salvo and the loan is not repaid. Bank can recover losses from accountant who committed the fraud.
Breach of contract
Third parties cannot usually sue accountants for breach of contract because the third parties are merely incidental beneficiaries who do not acquire any rights under the accountant-client contract. THey are not in privity of contract with the accountants.
Privity of contract
The state of 2 specified parties being in contract
Section 10A to the securities exchange act of 1934
An accountant could uncover info about a client's illegal activities. Section 10A imposes duty on auditors to detect and report illegal acts committed by their clients.
How is an illegal act defined by section 10A
An act or omission that violates any law, or rule or regulation having the force of law.
What are the 10A requirements?
Unless an illegal act is inconsequential tha auditor must inform client's management and audit committee
If management fails to take timely and appropriate action to remdeiate auditor must report to BOD.
Once reported to BOD the BOD must inform the SEC within one business day. If they fail the auditor must notify the SEC the next business day.
Section 11a
A section of the Securities Act of 1933 that imposes civil liability on accountants and others for 1 making misstatements or omissions of material facts in a registration statement or 2 failing to find such misstatements or omissions
Due diligence defense
a defense that can be asserted to section 11. An accountant avoids liability if he or she had, after reasonable investigation, reasonable grounds to believe and did believe, that the statements were true and there was no omission of a material fact that would make the statements misleading.
Section 11a conditions
1. making misstatements or omissiions of material facts in a registration statement
2. FAiling to find such misstatements or omissions.
Plaintiff may recover what?
They may recover the difference between the price he or she paid for the security and the value of the security at the time of the lawsuit. The plaintiff does not have to prove that he relied on misstatement or omission. Privity is irrelevant.
SEction 10 b
A section of sec that prohibits manipulative or deceptive practice in connection with the purchase or sale of a security. Unlawful by use of interstate commerce to make misstatements or omissision of facts th or engage any act that would defraud or deceit any person in connection with the purchase or sale of any security
section 18a
A section that imposes civil liability on any person who makes false or misleading statements in any application, report, or document filed with the SEC.
What are 2 ways a person can defeat imposition of liability under section 18a?
Defendant can show they acted in good faith or they can show the plaintiff had knowledge of the false/misleading information when the sec was purchased/sold.
Private securities litigation reform act
Limits a defendant's liability to its proportionate degree of fault.
Imposes pleading and procedural requirements that make it more difficult to bring class action securities lawsuits.
Gives proportionate liability.
SEction 21
makes it a criminal offense for a person to
1. willfully make any untrue statement of material fact in a registration statement filed with the SEC.
2. Omit any material fact necessary to ensure that the statements made in the registration statement are not misleading
or 3. willfully violate any other provision of the SEC.
SEction 32 A
Makes it a criminal offense or any person to willfully and knowing make or cause any false or misleading statement in any application, report, or other document required to be filed iwth the SEC.
Tax reform act of 1976
Imposes criminal liability on accountants and others who prepare federal tax returns if they
1. willfully understate a client's tax liability.
2. Negligently understate the tax liability
or
3. Aid or assist in the preparation of a false tax return
Racketeer influenced and corrupt organizations act
A federal act that provides for both criminal and civil penalties for securities fraud.
SOX
federal act that imposes new rules that affect public accountants
What does SOX do?
created PCAOB
REquires accounting firms to register with PCAOB
Separates audit services and non-audit services
REquires an audit partner of the accounting firm to supervise an audit and approve an audit report requires a second partner to review and approve the report
Prohibits employment of an accountant by a previous audit client for certain positions for a period of one year following the audit.
Accountant-client privilege
A state statute which provides that an accountant cannot be called as a witness against a client in a court action.
Work product immunity
a state statue that provides an accountant's work papers cannot be used against a client in a class action.
entrepreneur
A person who forms and operates a new business either by himself or herself or with others.
sole proprietorship
A form of business in which the owner is actually the business the business is not a separate legal entity
advantages of sole proprietor
easy and cheap to form
Owner can make all management decisions
proprietor has rights to all profits
can be easily transferred or sold.
liability of sole proprietor
They bear the risk of loss of the business. Have unlimited personal liability as well.
Taxation of sole proprietorship
Separate legal entity so doesn't pay taxes at business level. Instead reported on sole proprietor's tax return. Has to file and pay taxes to state and federal government.
General partnership
An association of 2 or more persons to carry on as co-owners of a business for profit. Also known as an ordinary partnership. Rights and duties are established in a partnership agreement.
General partners
Persons liable for the debts and obligations of a general partnership.
Uniform partnership act
A model act that codifies partnership law. Most states have adopted it in part or whole.
What does the uniform partnership act require?
Must file fictitious business name to operate under a trade name
Must publish notice of use of trade name in a newspaper of general circulation
Partnerhip canot indicate that it is a corp.
Formation of general partnership
1. association of 2 ppl or more
2. Carrying on a business
3. as co-owners
4. for profit
Partnership agreement
written, oral, or implied can be created inadvertently. No formalities necessary. Good practice to put it in writing in case of disagreement.
Taxation of partnerships
do not pay federal taxes instead the income and losses flow through to partners personal inome tax.
Right to participate in management
A situation in which, unless otherwise agreed, each partner has a right to participate in the management of a partnership and has an equal vote on partnership matters. Each partner has one vote regardless of size of capital contribution or profit share.
Right to share in profits
unless otherwise agreed equal.
Right to compensation
Not entitled to salary unless agreed upon by partners
indemnification
right of a partner to be reimbursed for expenditures incurred on behalf of the partnership. they have the right to this so long as expenses are reasonable and incurred in ordinary and proper conduct of the business.
Right to return loans and capital
A partner who loans has right to repayment but this right is subordinate to the claims of creditors who are not partners. Also entitled to receive interest.
Right to information
Right to demand true and full information from all partners of all things affecting partnership
Duty of loyalty
A duty that a partner owes not to act adversely to the interests of a partnership.
Self dealing
occurs when a partner personally deals with the partnership such as buying or selling goods or property to the partnership. Such actions permitted only if full disclosure is made and consent of other partners is obtained.
Usurping a partnership opportunity
A partner who is offered an opportunity on behalf of partnership cannot usurp opportunity for themselves. Example if a third party offers a business opportunity to partner in his partnership status, partner cannot accept it unless he first offers it to the partnership.
compete with partnership
can't compete without consent of partners.
seceret profits
can't make seceret profits
breach of confidentiality
partners muse keep partnership info private
misuse of property
Owe duty not to use property for personal use
Duty of care
Obligation partners have to use same level of care and skill a reasonable person in the same position would use in the same circumstances a breach of this duty is negligence. Partners are not liable for honest errors in judgement
Duty to inform
a partner must inform co-partners of all info he/she possesses that is relevant to affairs of the partnership.
Duty of obedience
A duty that requires partners to adhere to provisions of partnership agreement and decisions of the partnership.
Action for an accounting
A formal judicial proceeding in which the court is authorized to 1. review the partnership and the partners transactions.
2. Award each partner his/her share of the partnership interests.
Joint and several liability
Tort liability of partners together and individually. A plaintiff can sue one or more partners separately. If successful the plaintiff can recover the entire amount of the judgment from any or all of the defendant partners who have been found liable.
Joint liability
Liability of partners for contracts and debts of the partnership. A plaintiff must name the partnership and all of the partners as defendants in a lawsuit A third party who sues to recover on a partnership contract or debt must name all partners in the lawsuit. if successful may collect against any or all of the partners. If not all named judgement can't be collected against any of the partners.
Liability of incoming partners
new partners are liable for existing debts and obligations only the the extent of his/her capital contribution. Incoming partner is liable for debts and obligations incurred by partnership after becoming partner.
Partnership for a term
A partnership created for a fixed duration
Partnership at will
Created with no fixed duration
Dossoluiotion
change in relation f partners caused by any partner ceasing to be associated in the carrying on of the business.
winding up
The process of liquidating a partnership's assets and distributing the proceeds to satisfy claims against the partnership.
Wrongful dissolution
A situation in which a partner withdraws from a partnership without having the right to do so at that time. Liable for damages caused by this
Notice of dissoluton
must be given to third parties.
1. Actually dealt with partnership must be verbally or written given actual notice
2. Third parties who have knowledge of but haven't contracted must be given constructive notice which means newspaper.
3. No dealing no knowledge no notice
distribution of assets
1. creditors (other than partners)
2. Creditor-partners
3. Capital contributions
4. Profits
Continuation of partnership
surviving/remaining partners have right to continue partnership after dissolution should enter into a continuation agreement which specifies amount to be paid to outgoing partners.
Liability of outgoing partners
Doesn't change the liability for exisiting partnership liabilites. Each partner is responsible for their share of debts at dissolution.