Ch 5 Solutions.doc - Chapter 5 Legal Liability Concept Checks P 124 1 Several factors that have affected the increased number of lawsuits against CPAs

Ch 5 Solutions.doc - Chapter 5 Legal Liability Concept...

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Chapter 5 Legal Liability Concept Checks P. 124 1. Several factors that have affected the increased number of lawsuits against CPAs are: The growing awareness of the responsibilities of public accountants on the part of users of financial statements. An increased consciousness on the part of the SEC regarding its responsibility for protecting investors’ interests. The greater complexities of auditing and accounting due to the increasing size of businesses, the globalization of business, and the intricacies of business operations. Society’s increasing acceptance of lawsuits. Large civil court judgments against CPA firms, which have encouraged attorneys to provide legal services on a contingent fee basis. The willingness of many CPA firms to settle their legal problems out of court. The difficulty courts have in understanding and interpreting technical accounting and auditing matters. 2. Business failure is the risk that a business will fail financially and, as a result, will be unable to pay its financial obligations. Audit risk is the risk that the auditor will conclude that the financial statements are fairly stated and an unmodified opinion can therefore be issued when, in fact, the financial statements are materially misstated. When there has been a business failure, but not an audit failure, it is common for statement users to claim there was an audit failure, even if the most recently issued audited financial statements were fairly stated. Many auditors evaluate the potential for business failure in an engagement in determining the appropriate audit risk. 3. The difference between fraud and constructive fraud is that in fraud the wrongdoer intends to deceive another party whereas in constructive fraud there is a lack of intent to deceive or defraud. Constructive fraud is highly negligent performance. 5-1
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P. 134 1. The four major sources of auditor legal liability are: Liability to clients. Liability to third parties under common law. Civil liability under federal securities laws. Criminal liability. 2. Liability to clients under common law has remained relatively unchanged for many years. If a CPA firm breaches an implied or expressed contract with a client, there is a legal responsibility to pay damages. Traditionally the distinction between privity of contract with clients and lack of privity of contract with third parties was essential in common law. The lack of privity of contract with third parties meant that third parties would have no rights with respect to auditors except in the case of gross negligence. That precedent was established by the Ultramares case. In subsequent years, some courts have interpreted Ultramares more broadly to allow recovery by third parties if those third parties were known and recognized to be relying upon the work of the professional at the time that the professional performed the services ( foreseen users ). A few jurisdictions have rejected the Ultramares
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  • Spring '14
  • AngelaM.Woodland

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