Chap 5 Changed legal environment

Question 1

what are the factors that contribute to the trend of the number of lawsuits against auditors and sizes of awards , including suits involving thrid parties under common law and the federal securities act? (8)

Answer 1

1. Growing awareness of the responsibilities of CPAs 2. Increased effort by the SEC to protect investors’ interests 3. Increased complexity of auditing and accounting 4. Litigious society 5. Recession and tough economic times resulting in business failures 6/ Attorneys often provide legal services on a contingent-fee basis 7. CPA firms willing to settle legal cases out of court 8. Difficulties of judges and juries understanding technical accounting and auditing matters

Question 2

T/F Under common law, auditors must fulfill contracts with clients and may also be held liable to third parties

Answer 2

T

Question 3

the auditor generally owes a duty of care to third parties who are part of a limited group of persons whose reliance is “_____” by the auditor

Answer 3

foreseen

Question 4

IF auditors fail to provide the services or not exercise due care in their peforance, they are liable to clients for what (3)

Answer 4

1. negligence 2. breach of contract 3. in some circumstances to parties other than their clients

Question 5

Auditors may also be held liable to third parties based on statute, including what 3 acts?

Answer 5

1. Securities Act of 1933 2. Securities Act of 1934, 3. Sarbanes Oxley Act

Question 6

Under, _____ _____ audit professionals have a responsibility to fulfill implied or expressed contracts with clients

Answer 6

common law

Question 7

a criminal convinction against an auditor can result when plaintiffs demonstrate that the auditor intended to ?

Answer 7

deceive or harm others

Question 8

Under common law, audit professionals have a responsibility to fulfill ____ or ____ contracts with clients

Answer 8

implied expressed