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issuing an incorrect opinion because it failed to comply with the requirements of auditing standards
prudent person concept
the auditor is only expected to conduct the audit with due care and not expected to be perfect nor be the guarantor of financial statements
Terms related to Negligence and Fraud
1. ordinary negligence
2. Gross negligence
3. Constructive Fraud
absence of reasonable care that can be expected of a person in a set of circumstances. What other competent auditors would have done in the same situation
not intentional, BUT SO BAD, deemed to be bad. Recklessness. Adequate audit not done, but still issued an opinion
3rd party beneficiary
does not have privity to contract, but is known to the contracting parties and has certain rights and benefits under contracts
Separate and proportional liability
petitioned liability. able to make down in percentage of responsibility
4 Sources of Legal Liability
2. 3rd parties under common law
3. civil liability under Securities laws
4. Criminal liability
Parties: forseen (ordinary negligence) and unforseen (gross negligence) -> higher standard
Only primary beneficiary can sue if those services are rendered negligently. Not held liable for honest blunders beyond their control to 3rd parties
Auditor's Defense Against Suits
1. Lack of Duty
3. Contributory Negligence
4. Absence of casual connection
3 Auditor's Defense against 3rd parties
1. lack of duty to persorm
2. nonnegligent performance
3.absence of casual connection
Securities Act 1933
reporting requirements for companies issuing NEW SECURITIES. Must only prove that the audited financial statements contained material misstatement or omission. Auditor has the burden of defense; adequate audit done and all of portion of loss was caused by factors other than misleading financial statements. Defines rights of 3rd parties. Only ppl can sue are original purchasers.
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