Chapter_5_Solutions_Manual - 1Chapter 5 Legal Liability...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Chapter 5 Legal Liability Review Questions 5-1 Several factors that have affected the increased number of lawsuits against CPAs are: 1. The growing awareness of the responsibilities of public accountants on the part of users of financial statements. 2. An increased consciousness on the part of the SEC regarding its responsibility for protecting investors' interests. 3. The greater complexities of auditing and accounting due to the increasing size of businesses, the globalization of business, and the intricacies of business operations. 4. Society's increasing acceptance of lawsuits. 5. Large civil court judgments against CPA firms, which have encouraged attorneys to provide legal services on a contingent fee basis. 6. The willingness of many CPA firms to settle their legal problems out of court. 7. The difficulty courts have in understanding and interpreting technical accounting and auditing matters. 5-2 The most important positive effects are the increased quality control by CPA firms that is likely to result from actual and potential lawsuits and the ability of injured parties to receive remuneration for their damages. Negative effects are the energy required to defend groundless cases and the harmful impact on the public's image of the profession. Legal liability may also increase the cost of audits to society, by causing CPA firms to increase the evidence accumulated. 5-3 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 unqualified opinion can therefore be issued when, in fact, they 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. 5-4 The prudent person concept states that a person is responsible for conducting a job in good faith and with integrity, but is not infallible. Therefore, the auditor is expected to conduct an audit using due care, but does not claim to be a guarantor or insurer of financial statements. 5-1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
5-5 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. 5-6 Many CPA firms willingly settle lawsuits out of court in an attempt to minimize legal costs and avoid adverse publicity. This has a negative effect on the profession when a CPA firm agrees to settlements even though it believes that the firm is not liable to the plaintiffs. This encourages others to sue CPA firms where they probably would not to such an extent if the firms had the
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/27/2011 for the course AC555 AC555 taught by Professor Tarbet during the Spring '10 term at Keller Graduate School of Management.

Page1 / 13

Chapter_5_Solutions_Manual - 1Chapter 5 Legal Liability...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online