chapter 05.docx - Auditing and Assurance Services 16 e...

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Auditing and Assurance Services, 16 e Chapter 5 Legal Liability 5.1 Learning Objective 5-1 1) Which of the following factors does not contribute to the number of lawsuits against auditors? A) large civil court judgments against CPA firms awarded in a few cases B) growing awareness of the responsibilities of public accountants by users of financial statements C) the simplicity of auditing and accounting functions D) an increased consciousness by the SEC for its responsibility for protecting investors' interests 2) Discuss three major factors that have contributed to the recent increase in the number of lawsuits against auditors and the size of awards to plaintiffs. Answer: Major factors include: The growing awareness of the responsibilities of public accountants by users of financial statements An increased consciousness on the part of the Securities and Exchange Commission regarding its responsibility for protecting investors' interests The complexity of auditing and accounting functions caused by the increasing size of businesses, the globalization of business, and the complexities of business operations and financing transactions The tendency of society to accept lawsuits by injured parties against anyone who might be able to provide compensation, regardless of who was at fault, coupled with joint and several liability doctrine The global recession and tough economic times result in business failures, which prompt stakeholders to seek restitution from others, including external auditors Large civil court judgments against CPA firms awarded in a few cases The willingness of CPA firms to settle legal problems out of court to avoid costly legal fees and adverse publicity, rather than pursuing resolution through the judicial process The difficulty judges and jurors have understanding and interpreting technical accounting and auditing matters 3) The auditor generally owes a duty of care to third parties who are part of a limited group of persons whose reliance is "foreseen" by the auditor. Answer: TRUE 5.2 Learning Objective 5-2 1) A(n) ________ failure occurs when an auditor issues an erroneous opinion because it failed to comply with requirements of auditing standards. A) business B) audit C) ethics D) process
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2) The expectation gap A) exists between the auditor and the SEC. B) exists because auditors guarantee the accuracy of the financial statements. C) often results in unwarranted lawsuits against the auditor. D) is a legal concept supported by the federal courts.
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