Chapter 4 Flashcards
business failure
when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions
audit failure
when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards
audit risk
represents the possibility that the auditor concludes after conducting an adequate audit that the financial statements were fairly stated when, in fact, they were materially misstated
prudent person concept
people have to act with reasonable care and diligence
ordinary negligence
absence of reasonable care that can be expected of a person in a set of circumstances
gross negligence
lack of even slight care, tantamount to reckless behavior, than can be expected in a person
constructive fraud
existence of extreme or unusual negligence even though there was no intent to deceive or do harm
fraud
occurs when a misstatement is made and there is both the knowledge of its falsity and the intent to deceive
breach of contract
failure of one or both parties in a contract to fulfill the requirements of the contract
third party beneficiary
a third party who does not have privity of contract but is known to the contracting parties and is intended to have certain right
four sources of auditors legal liability
liability to clients
liability to third parties under common law
civil liability under the federal securities law
criminal liability
lack of duty to perform
when a cpa firm claims that there was no implied or express contract
non-negligent performance
the firm claims that the audit was performed in accordance with auditing standards
contributory negligence
the auditor claims the client’s own actions either resulted in the loss that is the basis for damages or interfered with the conduct of the audit that prevented the auditor from discovering the mistakes
absence of causal connection
when an auditor claims that there was another source or party that caused the damages
ultramares doctrine
where auditors are not liable to creditors for negligence
forseen users
members of a limited class of users the auditor knows will rely on the financial statements, this is used in the broadening of the ultramares doctrine
foreseeable users
where any user the auditor could have reasonably seen would use the financial statements, gets privity of contract
Securities Act of 1933
imposes the burden of proof on the auditor to third parties for material misstatements, the auditor must prove
1) an adequate audit was conducted
2) all or a portion of the plaintiff’s loss was caused by factors other than misleading financial statements
Securities Act of 1934
required that each public company submit financial statements each year
scienter
knowledge and intent to deceive, ruled in Hochfelder v Ernst & Ernst that in order to be sued for negligence there must be this
Foreign Corrupt Practices Act of 1977
makes it illegal to offer a bribe to an official of a foreign country for purpose of exerting influence and obtaining or retaining business
criminal liability for accountants
CPA’s can be found guilty for criminal action under both federal and state laws
