Legal Liability Chapter 5 Learning Objective 1

Transcript:Legal Liability Chapter 5 Learning Objective 1:
Legal Liability Chapter 5 Learning Objective 1 Understand the litigious environment in which CPAs practice. Changed Legal Environment Audit professionals have a responsibility under common law to fulfill implied or expressed contracts with clients. They are liable to their clients for negligence and/or breach of contract should they fail to provide the services or not exercise due care in their performance. Learning Objective 2 Explain why the failure of financial statement users to differentiate among business failure, audit failure, and audit risk has resulted in lawsuits. Business Failure, Audit Failure, and Audit Risk Business Failure Audit Failure Audit Risk Business Failure, Audit Failure, and Audit Risk Business failure It occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions. Business Failure, Audit Failure, and Audit Risk Audit failure It occurs when the auditor issues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards (GAAS). Business Failure, Audit Failure, and Audit Risk Audit risk It represents the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated. Learning Objective 3 Use the primary legal concepts and the terms concerning accountants’ liability as a basis for studying legal liability of auditors. Lack of privileged communication Liability for the acts of others Prudent person concept Legal Concepts Affecting Liability Federal securities laws Third party Client Major Sources of Auditor’s Legal Liability Criminal liability Learning Objective 4 Describe accountants’ liability to clients and related defenses. Liability to Clients The most common source of lawsuits against CPAs is from clients. Legal Terms Affecting CPAs’ Liability Terms related to negligence and fraud Ordinary negligence Gross negligence Constructive fraud Fraud Legal Terms Affecting CPAs’ Liability Terms related to contract law Breach of contract Third party beneficiary Legal Terms Affecting CPAs’ Liability Other terms Common law Statutory law Joint and several liability Separate and proportionate liability Auditor’s Defenses Against Client Suits Lack of duty Nonnegligent performance Contributory negligence Absence of causal connection Learning Objective 5 Describe accountants’ liability to third parties under common law and related defenses. Liability to Third Parties Under Common Law Ultramares doctrine Foreseen users Foreseen Users Credit alliance Restatement of torts Foreseeable users Learning Objective 6 Describe accountants’ civil liability under the