Chapter 05 Slides

Chapter 05 Slides - 5 - 1 Click to edit Master subtitle...

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Unformatted text preview: 5 - 1 Click to edit Master subtitle style Acct 4510/5510 5 - 1 Legal Liability Chapter 5 11 Acct 4510/5510 5 - 2 Acct 4510/5510 Learning Objective 1 Understand the litigious environment in which CPAs practice. 22 Acct 4510/5510 5 - 3 Acct 4510/5510 Changed Legal Environment Acct 4510/5510 33 Audit professionals have a responsibility under common law to fulfill implied or expressed contracts with clients. They are liable to their clients for negligence and/ or breach of contract should they fail to provide the services or not exercise due care in their performance. Despite efforts by the profession to address the legal liability of CPAs 5 - 4 Acct 4510/5510 Changed Legal Environment Major contributors: Growing awareness of responsibilities of public accountants by users of financial statements Increased consciousness of the Securities and Exchange Commission (SEC) for its responsibility for protecting investors interests Complexity of auditing and accounting functions caused by increasing size of businesses, globalization of business, and complexities of business operations 5 - 5 Acct 4510/5510 Changed Legal Environment (continued) Major contributors: Large civil court judgments against CPA firms awarded in a few cases encourage attorneys to provide legal services on a contingent-fee basis offers the injured party a potential gain when the suit is successful, but minimal losses when it is not Willingness of many CPA firms to settle legal problems out of court in an attempt to avoid costly legal fees and adverse publicity, rather than resolution through judicial process 5 - 6 Acct 4510/5510 Differentiate Among Business Failure, Audit Failure, and Audit Risk Acct 4510/5510 66 Business Failure It occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions. Audit Failure It occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards. 5 - 7 Acct 4510/5510 Legal Concepts Affecting Liability Acct 4510/5510 77 Prudent person concept The legal concept that a person has a duty to exercise reasonable care and diligence in the performance of obligations....
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Chapter 05 Slides - 5 - 1 Click to edit Master subtitle...

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