Auditing Principles - Legal Liability of CPA

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  1. If a CPA performs an audit recklessly, the CPA will be liable to third
    parties who were unknown and not foreseeable to the CPA for
    Gross negligence
  2. Which of the following approaches to auditor’s liability is lease
    desirable from the CPAs perspective?
  3. In cases of breach of contract, plaintiffs generally have to prove all
    of the following except:
    The CPAs made  a false statement
  4. If the CPAs provided negligent tax advice to public company, the client
    would bring suit under
    Common law
  5. Which of the following case reaffirmed the principles in the Ultramares
    Credit alliance corps v Arthur anderson
  6. Under common law, the CPA who were negligent may mitigate some damages
    to a client by providing:
    Contributory negligence
  7. Under the securities and exchange act of 1934 auditors and other defendant
    are faced with
    Proportionate liability
  8. A CPA issued an unqualified opinion on the financial statement of a company
    that sold common stock in a public offering subject to the securities act of
    1933. Based on a misstatement in the financial statements the CPA is being sued
    by an investor who purchased shares of this public offering. Which of the
    following represent a viable defense?
    The false statement is immaterial in the overall context of thefinancial statements
  9. Which of the following elements is most frequently necessary to hold a CPA liable to a client?
    Failed to exercise due care
  10. Which statement best expresses the factors that purchasers of securities registered under the securities act of 1933 need not prove to
    recover losses form the auditors?
    The purchasers of securities must prove that the financial statementswere misleading then , the burden of proof is shifted to the auditors to showthat the audit was performed with due dilligence
  11. The most significant result of the Continental Vending case was that
    Created a more general awareness of the possibility of auditor criminalprosecution
  12. The 1136 tenant’s case was important because of its emphasis upon the legal
    liability of the CPA when associated with:
    Unaudited financial statements
  13. Common Law
    • through case decision
    • Breach of contract
    • Negligence
    • Fraud
  14. Statutory Liability
    Develops when government passes laws
  15. Primary Sources of CPA Liability
    • Breach of contract
    • Negligence
    • Fraud
    • Statutory
  16. Tort
    a wrongful act or an infringement of a right (other than under contract) leading to civil legal liability.
  17. Negligence
    Ordinary - lack of degree of care that ordinary person would exercise

    Gross -  Lack of even the slightest care
  18. Fraud
    Misrepresentation -  of a material fact

    Constructive - does not involve misrep
  19. Elements of Proof by Client Under Common Law
    Duty - CPA accepted duty

    Breach of Duty - CPA breached Duty

    Losses - suffered by planitff

    Causation - losses were caused by CPA
  20. Liability
    Proportionate  - % based

    Joint and Several - one who has money pays
  21. Ultramares Approach
    Known - Auditors must be aware FIN STMT used for a particular purpose by a known 3rd party

    • Ultramares vs Touche
    • Credit alliance vs Arthur Anderson
  22. Restatement Approach
    Forseen - Auditors must be aware FIN STMT could be used for a particular purpose by a unknown 3rd party

    Rush Factors vs Levin
  23. Rosenblum
    Forseeable - virtually all 3rd parites who rely on financial statements

    Rosenblum v Adler
  24. Ultrameres vs Touche
    common law: Auditors could be held liable to 3rd party beneficiaries for ordinaly negligence
  25. Credit Alliance v Arthur Anderson
    common law: 3rd party must demonstrate reliance on fin stmnts
  26. Rusch Factors v Levin
    common law: ordinary negligence not specifically id by auditors
  27. Rosenblum v Adler
    held liable for ordinary neligience that auditors could not ave forsen
  28. 1933 Securities Act
    • loss - yes
    • misleading fin stmnts - yes
    • reliance on stmnts - NO
    • Auditors must prove due diligence
    • Escott v Bar Chris Construction
  29. 1934 Securities Act
    • loss - yes
    • misleading fin stmnts - yes
    • reliance on stmnts - YES
    • third party must prove scienter (Auditors intent to deceive)
    • Ernst and Ernst v Hchfelder
  30. Proportionate Liability under 1934 act
    • Private securities litigation reform act of 1995 - 
    • placed limits on amount auditors liability by establishing proportionate liability
  31. RICO
    • United States v Simon: 2 partners and manager convicted of mail fraud and filing misstatement
    • United States v Arthur Anderson: destruction of documents
  32. SEC
    Has power to prohibit CPA from reporting on SEC registrants
  33. Unaudited Financial Statements of Non-Public Companies
    Compilation - no assurance - based on info provided by client

    Review - limited assurance - based on limited verification procedures
Card Set
Auditing Principles - Legal Liability of CPA
Auditing Principles - Legal Liability of CPA
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