25 terms

Chapter 4: Legal Liability

audit failure
issuing an incorrect opinion because it failed to comply with the requirements of auditing standards
audit risk
risk of giving the wrong opinion
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
4. Fraud
Ordinary negligence
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
Gross negligence
lack of even slight care, reckless behavior
Constructive fraud
not intentional, BUT SO BAD, deemed to be bad. Recklessness. Adequate audit not done, but still issued an opinion
intent to deceive
Breach of Contract
failure of one or both parties to fulfill contract
3rd party beneficiary
does not have privity to contract, but is known to the contracting parties and has certain rights and benefits under contracts
Common law
developed through court decisions rather than govt statutes
Statutory law
laws on the books. passed by govt unit
Joint and several liability
no petitioning of liability (no percentage divyed up)
Separate and proportional liability
petitioned liability. able to make down in percentage of responsibility
4 Sources of Legal Liability
1. Clients
2. 3rd parties under common law
3. civil liability under Securities laws
4. Criminal liability
1136 Tenants (1967)
if what you do should have uncovered fraud you could be held liable
Ultramares (1931)
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
2.Nonnegligent Performance
3. Contributory Negligence
4. Absence of casual connection
Lack of Duty
CPA firm claims that there was no implied or expressed contract to perform duty
Nonnegligent Performance
we followed all auditing standards. BEST DEFENSE
Contributory Negligence
Auditor claims the client own actions resulted in the loss
Absence of Causal Connection
took a loss, but cant connect it to me. i wasnt the reason
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.
Securities Act 1934
Extended to everyone who buys stock.Prohibits any fraudulent activities related to the sale and or purchase of securites