Ch 4 Flashcards
Why does the potential liability of auditors for “malpractice” exceed that of physicians or other professionals?
A CPA’s liability is to the investors and creditors
Distinguish between ordinary negligence and gross negligence within the context of the CPA’s work.
Ordinary negligence is failure to perform a duty in accordance with a applicable standards.
Gross negligence is substantial failures on the part of an auditor to comply with GAAS.
What is meant by the term privity?
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How does privity affect the auditor’s liability under common law?
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Define Third-party beneficiary.
A person, not the auditors or their client, who is named in the contract (or known to the contracting parties) with the intention that such person should have definite rights and benefits under the contract.
What is common law?
Unwritten law that has developed through court decisions; it represents judicial interpretation of a society’s concept of fairness.
What is statutory law?
Written law created by the state or federal legislative bodies.
What is the liability of auditors under the Ultramares approach?
They must have been aware that the financial statements were to be used for a particular purpose by a known party or parties and must have taken some action to indicate knowledge.
What is the liability of auditors under the Restatement approach?
They knew the audited financial statements were for use for a particular purpose, but the auditors did not necessarily know the specific user.
What is the liability of auditors under the Rosenblum approach?
They should have realized that it was reasonably foreseeable that the financial statements would be used by this user.
Briefly describe different common law precedents set by the Ultramares v. Touch Co. & the Rosenblum v. Adler case.
U v. T - Auditors should be held liable to unidentified third-party users of the audit for gross negligence or fraud.
R v. A - CPAs can be held liable for ordinary negligence to any third party that auditors could “reasonably foresee” as recipients
What landmark case was embraced by the court in the case of the Credit Alliance v. Arthur Andersen & Co.?
The Ultramares v Touch Co. case
Identify the two factors that the court stated in the Credit Alliance v. Arthur Andersen & Co case must be proved for auditors to be held liable for ordinary negligence to a third party.
Proof that the third party was known by the auditors & the auditors took some action to indicate that knowledge.
Compare auditors’ common law liability to clients and their third-party beneficiaries with their common law liability to other third parties.
Exercise due professional care.
Contrast joint and several liability with proportionate liability.
J&S - defendants held jointly responsible for losses attributed to the class as well as liable for any share of losses that cannot be collected from those unable to pay their share. P - allocating damages to each liable group according to that group's pro rata share of any damages recovered by the plaintiff.
