MODC - Module C - Legal Liability MODULE C Legal Liability...

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Module C - Legal Liability MODULE C Legal Liability LEARNING OBJECTIVES Review Checkpoints Exercises, Problems, and Simulations 1. Identify and describe auditors’ exposure to lawsuits and loss judgments. 1, 2 71 2. Specify the characteristics of auditors’ liability under common law and cite some specific case precedents. 3, 4, 5, 6, 7, 8, 9 54, 55, 56, 57, 58, 59, 60, 61, 62, 64 (partial) 3. Describe auditors’ liability to third parties under statutory law. 10, 11, 12 4. Specify the civil and criminal liability provisions of the Securities Act of 1933. 13, 14, 15, 16, 17 65 (partial), 66, 73 5. Specify the civil and criminal liability provisions of the Securities Exchange Act of 1934. 18, 19, 20, 21, 22 64 (partial), 65 (partial), 67, 68, 69 6. Understand recent developments that affect auditors’ liability to clients and third parties. 23, 24, 25, 26 63, 70, 72 MODC-1
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Module C - Legal Liability SOLUTIONS FOR REVIEW CHECKPOINTS C.1 Auditors owe clients the responsibility to perform services in accordance with the contract (engagement letter) and to conduct the audit in accordance with generally accepted auditing standards. Auditors owe third parties the responsibility of conducting the audit in accordance with generally accepted auditing standards. In each of these situations, auditors can be held liable if their failure to perform in accordance with the contract or generally accepted auditing standards results in an economic loss to clients or third parties. C.2 Common law liability uses legal precedent to identify the responsibility of parties in situations where there is no violation of a written law or statute. Clients and nonshareholder third parties can bring suit against auditors for common law liability. Statutory liability involves the violation of a written law. Third-party shareholders can bring suit against auditors for statutory liability. C.3 Under common law liability, clients can bring suit against auditors for either breach of contract or tort actions. Prior to bringing suit, clients must demonstrate: 1. They suffered an economic loss. 2. Auditors did not perform in accordance with the terms of the contact (for breach of contract). 3. Auditors failed to exercise the appropriate level of professional care (for torts). 4. The loss was the result of the breach of contract or failure to exercise the appropriate level of professional care. C.4 Auditors owe clients the responsibility for conducting the audit using the appropriate level of professional care. If they do not do so, they have tort liability for ordinary negligence, gross negligence, or fraud. C.5 To bring suits against auditors under common law, third parties must demonstrate: 1. They suffered an economic loss. 2.
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This note was uploaded on 01/21/2010 for the course ACC 492 ACC 492 taught by Professor Benmathews during the Spring '09 term at University of Phoenix.

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MODC - Module C - Legal Liability MODULE C Legal Liability...

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