Chapter 4 Power Point

Chapter 4 Power Point - Chapter 4 Legal Environment...

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Chapter 4 Legal Environment Affecting Audits Prepared by Adrianne E. Slaymaker, D.B.A. CPA
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Auditors and Risk Audit Risk The possibility that the auditors issue opinions that ICFR is effective and financial statements are fair when that is not true Audit failure occurs when an auditor issues an inappropriate audit report Audit risk is composed of : Inherent Risk Control Risk Detection Risk Audit failures are exposed when fraud is discovered or a company goes bankrupt Learning Objective #1
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Who Can Sue the Auditor? A plaintiff who has standing can bring a legal cause of action against an auditor Four descriptions of standing apply: 1. Privity 2. Near privity 3. Foreseen third parties 4. Foreseeable third parties Learning Objective #1
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Cause of Action Negligence – absence of due professional care Fraud Breach of Contract Statutory violations Only those in close proximity will be granted standing for negligence Learning Objective #1
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Privity Defined as “the connection or relationship between two parties each having a legally recognized interest in the same subject matter” Ultramares case – a person or entity must have privity with an auditor in order to collect damages if an auditor is negligent Learning Objective #1
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Near Privity Three part test 1) Did the auditor know the financial statements were to be used for a specific purpose? 2) Did the auditor know the third party? 3) Some action by the auditor showing an understanding that the third party was going to rely on the financial statements Learning Objective #1
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Foreseen and Foreseeable Third Parties Learning Objective #1
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This note was uploaded on 02/22/2012 for the course ACCT 512 taught by Professor Slaymacker during the Spring '12 term at Globe.

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Chapter 4 Power Point - Chapter 4 Legal Environment...

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