Auditors Liability Flashcards
What are the three branches of law where liability can arise for auditors and accountants
Statute
Contract law
Tort law
What is three things does the injured party have to show for taught negligence to be proved
Duty of care exists
That the duty of care was breached
That the breach caused financial loss
What is the three fold test that must be satisfied in order to establish a duty of care owned by auditor to a third-party
What’s the auditor knew or should have known that the person would rely on the auditors work (that the damage was for seeable)
The third-party has suffered proximity (close enough to reasonably rely on the auditors work)
It must be fair just unreasonable to impose a liability on the auditor
What are examples to show that the auditors have exercise professional sufficient care
They keep up-to-date with current approaches to auditing
They apply ISA and ethical standards and safeguards
They comply with the terms of the engagement letter
They apply adequate system of quality management
They undergo adequate supervision education and training
What are the ways to restrict liability
Professional indemnity insurance - This will pay compensation to injured parties in case of negligence
Fidelity guarantee insurance - insures against the dishonesty of staff or partners
Incorporation – by incorporating from a partnership (unlimited liability) the firm can become a limited liability partnership. The partners personal wealth is protected
Liability limitation agreements – the engagement letter includes a cap on the amount of compensation payable to clients. This gives no protection against third-party claims and is only valid if it is fair and reasonable, approved by shareholders, and for the current year only
Proportional liability – on this system the auditor and client would share the burden of paying compensation to injured parties according to blame rather than ability to pay
