S03-Legal - LEGAL LIABILITY SECTION 3 Legal Liability and...

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LEGAL LIABILITY SECTION 3
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Legal Liability and Auditors Responsibilities Auditors are liable in law for their professional conduct Failure to exercise due care Legal liability evolves over time
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Common Law Case law or unwritten law Auditor may be liable for damages sufferd by clients or third parties
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Four conditions: 1. Legal duty of care 1. Breach of the duty 1. Damages 1. Reasonable proximate connection
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Duty of Care English courts London and General Bank, 1895 Must exercise reasonable care and skill A definition of reasonable care Where there is nothing to excite suspicion Where suspicion is aroused
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Pacific Acceptance v Forsyth, 1970 Duty of care still remains Reasonable skill and care calls for changed standards Standards more exacting How did the auditing profession deal with this?
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Liability to Clients If accountant agrees to perform services An engagement letter Privity of contract Auditors Liability for negligence 1. Internal control weaknesses 1. Insufficient reliable audit evidence 1. Too much reliance on management representations
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Types of Action by the client Breach of contract A tort action
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Auditor's defences Lack of duty Absence of misstatement Absence of negligence Contributory negligence No damages Absence of causal connection
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TC owned a cooperative apartment house MR failed to discover an embezzlement of more than $100,000 Facts: TC booked fee as audit expense MR marked each page of F/S as unaudited A letter of transmittal with F/S stated: 1. Prepared from books and records. 2. No independent verification taken. But MR did not disclaim an opinion
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Court found that MR was engaged to perform an audit 1. MR did perform some limited auditing procedures 1. MR included in working papers “missing invoices” MR ruled negligent The appellate court affirmed the decision MR had a duty to inform TC of known wrongdoing MR worksheets indicted some auditing procedures
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Italian Gifts v Dixon (2000) Review engagement Did not detect an under remittance of sales taxes with a corresponding over remittance of income taxes IG claiming damages Two lower courts rejected the claim 1. No duty owed 2. Nature of the review engagement 3. Bookkeeping function Ontario Court of Appeal overturned this rejection Contributory negligence
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A Canadian case on contributory negligence Facts: Kane, an agent for a Air Canada Kane’s son concealed the extension of credit to customers Airline should have been promptly paid for the tickets Air Canada eventually caught on to the deception and Kane had to pay $250,000 representing the outstanding sales Sued auditor because Kane could not recover from their customers
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S03-Legal - LEGAL LIABILITY SECTION 3 Legal Liability and...

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