Auditing Chapter 4

Front 1

Breach of Contract

Back 1

Failure of one or both parties to a contract to perform in accourdance with the contrat's provisions. A pulic accounting firm might be sued for brach of contract. Negligence on the part of the CPAs also constitutes breach of contract.

Front 2

Common Law

Back 2

Unwritten law that has developed through court decisions; it represents judicial interpretation of a socety's concept of fairness.

Front 3

comparative negligence

Back 3

A concept used by certain courts to allocate damages between negligent parties based on the degree to which each party is at fault. the allocation of damages is referred to as proprtionate liability.

Front 4

Compilation of financial statements

Back 4

The preparations of financial statements by CPAs based on representations of management, with the expression of no assurance concerning the statements' compliance with generally accepted accounting principles.

Front 5

constrtuctive fraud

Back 5

performing duties with such recklessness that persons believing the dutites to have been completed carefully are being misled. It differs from fraud in that constructive fraud does not involve knowledge of misrepersentations within the financial stements.

Front 6

Defendant

Back 6

The party against which dambages and suit are brought by the plaintiff.

Front 7

Due diligence

Back 7

a public accounting firm's contention that its audit work was adequate to support its opinion on finnacial stements included in a regisration statement filed with the SEC under the securities Act of 1933

Front 8

engagment letter

Back 8

a written contract summarizing the contractual relationship between the CPAs and the client. The engagement letter typically specifies the scope of professional services to be rendered, expected completion dates, and the basis for determination of the CPAs' fee. Engagement letters are discussed more fully in Chapter 6.

Front 9

Error

Back 9

An unintentional misstatement of financial stements or omission of an amount or a disclosure.

Front 10

Gross negligence

Back 10

lac of even slight care, indicative of a reckless disregard for one's professional responsibilities. Substantial failures on the part of an auditor to comply with GAAS's might be interpreted as gross negligence.

Front 11

Registartion statement

Back 11

a document including audited financial statments that must be filed with the SEC by anycompany in order to sell its securities to the public through the mails or interstate commerce. The Securities Act of 1933 provides liability to security purchasers for material misrepresentaions in registration stements.

Front 12

Scienter

Back 12

Intent to deceive, manipulate, or defraud. The U.S. Supreme Court held that scienter must be proved for the auditors to be held liable under the Securites Exchange Act of 1943

Front 13

Securities Act of 1933

Back 13

A federal securities statutecovering registration stements for securites to be sold to the public. The act requires auditors to exercise "due dilligence" and creates both civil and criminal penalties for misrepresntation.

Front 14

Securities Exchange Act of 1934

Back 14

A federal scurties statute requring public companies to file annual audited financial statements with the SEC. Taht act requires auditors to "act in good faith" and crates cicil and criminal penalties for misrepresentation.

Front 15

Tort

Back 15

A civil wrong. For financial statements audits, the primary tort involved is that of performing the engagemtn negligently.