ch 17 SM FINALca - Solutions for Chapter 17 Professional...

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Solutions for Chapter 17 Professional Liability Review Questions: 17-1. A variety of factors seems to be causing so many lawsuits including General public awareness of the possibilities and rewards of litigation. Our society has developed expectations that damages can be appropriately addressed in courtrooms. Joint and several liability statutes that permit a plaintiff to recover the full amount of a settlement from a public accounting firm even though that firm is found to be only partially responsible for the loss (often referred to as the deep pocket theory : sue those who can pay). Joint and several liabilities encourage lawsuits because the potential to receive awards for damages is increased. In addition, a defendant has to be only partially to blame to bear responsibility for (potentially) all losses. Increased complexity of audits caused by computerization of businesses, new types of business transactions and operations, more international business, and more complicated accounting standards. The increased complexity creates more opportunity for errors to take place, as well as for users to misunderstand financial statements. More demanding auditing standards for detection of errors and fraud. Users, including clients, expect auditors to find fraud. When damage is incurred through fraud, the party damaged looks to the auditor to have identified the fraud so that corrective action could have been taken. Pressures to reduce audit time and improve audit efficiency in the face of increased competition among public accounting firms. Sometimes such pressures can lead auditors to be less skeptical and demanding in their audit work. A misunderstanding by the general public who may mistakenly believe that an unqualified opinion is an insurance policy against investment losses. The public often has a difficult time distinguishing between a business failure and an audit failure. Many businesses fail, but the auditor's unqualified report does not insure against failure. The auditor's role is limited to an expression of an opinion on the fairness of financial statement presentations. Contingent fee arrangements for lawyers that allow plaintiffs who could not otherwise afford to do so to bring suits for damages incurred. The contingent fee,
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coupled with class action suits, punitive damages, and so on provide opportunities for lawyers to realize substantial fees on some cases. Class action suits increase the potential damages and thus encourage lawyers who might operate on a contingent fee basis to pursue cases that otherwise might not be pursued. 17-2. Common law is developed through court decisions, such as the Ultramares case. Statutory law is created by legislation, such as the Securities Act of 1933 and the 1934 Securities and Exchange Act.
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  • Spring '12
  • teresa
  • Auditor's report, U.S. Securities and Exchange Commission

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