Auditing - Chapter 5

Auditing - Chapter 5 - Outlines Auditing and Assurance...

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Chapter 5: Legal Liability Changed Legal Environment: common law responsibility to fulfill implied or expressed contracts with clients – failure results in liability for negligence and/or breach of contract Duty of care extends to 3 rd parties whose reliance is foreseen by auditor – common law liability and statutory liability (SOX, SE Acts), criminal if intent to deceive can be proven Factors contributing to increased # of suits: Growing awareness of CPA’s responsibilities Increased SEC responsibility and awareness thereof Complexities caused by increased business size, globalization, and complex business ops Deep-pocket concept of liability – sue who you think can pay Lawyers accepting lawsuits on contingent fee basis from previous large awards CPA firms willingness to settle out of court Difficulty in relaying technicalities to judges and jurors Distinguishing business failure, audit failure, and audit risk Business failure: when business is unable to repay lenders or meet expectations of investors because of economic or business conditions May portend accusation of audit failure from upset statement users Expectations gap = user’s belief that auditors guarantee the accuracy of the financial statements whereas auditors are expected only to act in accordance with auditing standards Audit failure: when an auditor issues an incorrect audit opinion because they failed to comply with the requirements of auditing standards Did auditor exercise due care in performing the audit? Law often allows parties who suffered losses recovery Audit risk: possibility that auditor declares the financial statements are fairly stated when, in fact, they were materially misstated – this risk is unavoidable Legal Concepts Affecting Liability CPAs are responsible for every aspect of their public accounting work Prudent Person Concept: conduct the audit with due care, but not expected to be perfect Undertake for good faith and integrity but not for infallibility, not liable for losses consequent upon pure errors of judgment Liability for the acts of others: general partners are jointly liable for civil actions against any owner. LLPs, LLCs, Corps, etc. provide protection of owner’s personal assets unless they were directly involved in the actions causing the incidence of liability / firm’s assets are always subject to damages / partners can be held liable for employee’s poor performance on an audit Lack of privileged communication: confidential discussion between auditor and client
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This note was uploaded on 11/06/2011 for the course BUSN 469 taught by Professor J during the Fall '11 term at Portland State.

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Auditing - Chapter 5 - Outlines Auditing and Assurance...

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