ch4 outline - Outlines Chapter 4_1 Chapter 4 AUDITORS LEGAL...

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Outlines Chapter 4_ 1 Chapter 4 AUDITORS' LEGAL RESPONSIBILITY 1. Introduction, Background Information a. As a starting point, realize that auditor liability differs significantly under: Common Law, The 1933 Securities Act, and The 1934 Securities Exchange Act b. Distinguish ordinary negligence and gross negligence. Many different definitions are available. Here are a couple: Ordinary negligence —A violation of a legal duty to exercise a degree of care that an ordinarily prudent person would exercise under similar circumstances. Often, people refer to ordinary negligence simply as “negligence.” Gross Negligence —Lack of even slight care, indicative of a reckless disregard for one’s professional responsibilities. Substantial failures on the part of an auditor to comply with GAAS might be interpreted as gross negligence. | Slight mistakes made | Ordinary Negligence | Gross Negligence | Perfect Terrible Audit Audit 2. Liability Under Common Law a. Who may sue? Client (breach of contract and tort liability—often the tort of negligence), Third Parties (tort liability—again, often the tort of negligence) b. What do they have to prove? 1. Duty —the CPA accepted a duty of care to exercise skill, prudence, and diligence. This is ordinarily easy to prove since by accepting an engagement a CPA assumes a responsibility to exercise due care. 2. Breach of duty —the CPA breached his or her duty of care through negligent performance. See below for details. 3. Loss —the client suffered a loss. 4. Proximate Cause —The loss resulted from the CPA’s negligent performance. c. Breach of Duty (from 2 above) Clients—Must prove auditor guilty of at least Ordinary Negligence. The client has “privity,” which is why establishing ordinary negligence is all that is needed.
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This note was uploaded on 09/08/2010 for the course BUS 129A at San Jose State.

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ch4 outline - Outlines Chapter 4_1 Chapter 4 AUDITORS LEGAL...

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