chap 5 legal concepts affecting liability Flashcards
T/F under common law, CPAs have the right to withhold info from the courts on the grouds that the info is privileged
F
occurs when a misstatement is made and there is both the knowledge of its falsity and the intent to decieve
fraud
laws that have been developed through court decisions rather than thru gov statutes?
common laws
the auditor is expected only to conduct the audit with due care and is not expected to be perfect…what concept is this?
prudent person concept
lack of even slight care , tantamount to reckless behavior, that can be expected of a person
gross negligence
What is an example of a potential claim where the source of liability is criminal liability?
federal government prosecutes auditor for knowingly issuing an icorrect audit report
What is an example of a potential claim where the source of liability is liability to third parties under common law?
bank sues auditor for not discovering that a borrowers FSs are materially misstated
what is constructive fraud?
existence of extreme or unusual negligence even though there was no intent to deceive or harm . also called recklessness.
absense of reasonable care that can be expected of a person in a set of circumstances?
ordinary negligence
if a CPA fails to correctly prepare and file a clients tax return, the cpa can be held liable for what?
- any penalties and interest that the client was required pay 2. the tax preparation fee charged 3. some cases can be punitive damanges
what is an example of a 3rd party beneficiary?
a bank that will be relying ont he audited financial statements to make a decision regarding loan to the company involved in an audit
what is a 3rd party beneficiary ?
a 3rd party who does not have privity of contract but is known to the contracting parties and is intended to have certain rights and benefits under the contract
What is an example of a potential claim where the source of liability is liability to client?
Client sues auditor for not discovering a material fraud during the audit
what are the 4 sources oa a auditors legal liability?
- liability to clients 2. liablity to third parties under common law 3. civil liability under the federa securities laws 4. criminal liability
what is common law?
laws that have been developed through court decisions rather than thru gov statutes
when lawsuits are brought under the federal securities laws, which damage approach applies?
separate and proportiionate liability
when lawsuits are brought under the federal securities laws, which damage approach applies when it can be shown the CPA defendant had actual knowledge of fraud or has participated in fraud?
joint and several liablility
Failure of one or both parties in contract to fullfill the requirements of the contract?
breach of contract
privity of contract?
when parties have a relationship that is established by a contract . this is what they have
what is the prudent person concept?
the auditor is expected only to conduct the audit with due care and is not expected to be perfect
laws that have been passed by U.S. Congress and other governmental units
statutory laws
existence of extreme or unusual negligence even though there was no intent to deceive or harm . also called recklessness.
constructive fraud
parties who have a relationship that is established by a contract are said to have what ?
privity of contract
If the firm operates a a LLP , LLC, a general coprations, or a professional corporation with limitied liablility, the liability for one owners actions does not extend to another owners what? unless what?
personal assets the other owner was directly involved in the actions of the owner causing the liability
what is gross negligence?
lack of even slight care , tantamount to reckless behavior, that can be expected of a person
What are the 3 groups an auditor is most likely to rely on and to which the partners can be liable for the work of under the laws of agency?
- employees 2. other CPA firms engaged to do part of the work 3. specialists called upon to provide technical information
the assessment against a defendant of that portion of the damage caused by the defendants negligence
separate separate and proportionate liablity
what would constructive fraud be in the case of an audit?
recklessness is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intention of deceiving FS users.
some states have statutes that permit privelged communication between the client and auditor but the intent at the time of the communication must have been what? This privilege does not exented to what?
for the communication to remain confidential federal courts
What is an example of a potential claim where the source of liability is civil liability under federal securities laws?
combined grouip of stockholder sues auditor for not discovering materially misstated FSs
what is ordinary negligence? example for auditors?
absense of reasonable care that can be expected of a person in a set of circumstances. auditor- it is in terms of what other competent auditors would have done in the same situation
what is separate separate and proportionate liablity?
the assessment against a defendant of that portion of the damage caused by the defendants negligence
the assessment against a defendant of the full loss suffered by the plantiff , regardless of the extent to which other parties shared in the wrongdoing.
joint and several liability
what is fraud ?
occurs when a misstatement is made and there is both the knowledge of its falsity and the intent to decieve
what is breach of contract?
Failure of one or both parties in contract to fullfill the requirements of the contract
a 3rd party who does not have privity of contract but is known to the contracting parties and is intended to have certain rights and benefits under the contract ?
a 3rd party beneficiary
what is joint and several liability?
the assessment against a defendant of the full loss suffered by the plantiff , regardless of the extent to which other parties shared in the wrongdoing.
what is statutory law?
laws that have been passed by U.S. Congress and other governmental units
the damage approaches of joint and several liablility and separate and proportiionate liability are generally only applicable in what cases (2)
- liability to third parties under common law 2. liablity under federal securities laws
most majore lawsuits against CPA firms have dealth with what?
audited and unaudited FSs
