Chapter 5 - Legal Liability

Question 1

Business Failure

Answer 1

When a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions.

Question 2

Audit failure

Answer 2

occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards.

Question 3

Audit risk

Answer 3

represents the possibility that the auditor concludes after conducting an adequate audit that the FINS were fairly stated when, in fact they were materially misstated. Audit Risk is unavoidable!

Question 4

Prudent Person

Answer 4

We are human, we make mistakes

Question 5

Levels of Negligence to Fraud

Answer 5

1. Ordinary Negligence
2. Gross Negligence
3. Constructive Fraud
4. Fraud

Question 6

Four Major sources of auditors legal liability

Answer 6

1. Clients
2. 3rd parties
3. Civil
4. Criminal

Question 7

Defenses from clients

Answer 7

1. Lack of duty - First and least expensive
2. Contributory Negligence - push it back onto client
3. Absence of causal connection - some other event caused it
4. Non-negligent performance - last and best defense, also most expensive, Prove we are following GAAS/PCAOB

Question 8

Defenses from 3rd parties

Answer 8

1. Credit alliance - Credit alliance v. Arthur Andersen
2. Restatement of torts - Reasonably limitd and identifiable group of users who have relied on the CPAs work.
3. Foreseeable users - Unlimited class
4. Ultra-mares Doctrine - has to be a primary user or beneficiary.

Question 9

Cenco Incorporated v, Siedman & Siedman

Answer 9

Liability to Clients - Siedman & Siedman won using Contributory Negligence and pushed it onto Cenco’s mgmt.

Question 10

1136 Tenants v. Max Rothenberg and Co.

Answer 10

Liability to Clients - 1136 Tenants won because Max Rothenberg and Co. didn’t look into the “missing invoices”

Question 11

Ultra-mares Corporation v. Touche

Answer 11

Liability to Third Parties - Ultra-mares lost because they weren’t primary beneficiaries.

Question 12

Rusch Factors v. Levin

Answer 12

Liability to Third Parties - Levin lost because Rusch Factors was under the Restatement of torts

Question 13

Credit Alliance v. Arthur Andersen

Answer 13

Liability to Third Parties - Arthur Andersen lost because Credit Alliance was a primary beneficiary

Question 14

Escottet al. v. BarChris Construction Co.

Answer 14

Securities Act of 1933

Question 15

Hachfelder v. Ernst & Ernst

Answer 15

Securities Act of 1934

Question 16

Howard Sirota v. Solitron Devices

Answer 16

Securities Act of 1934

Question 17

United States v. Andersen

Answer 17

Criminal Liability - Obstruction of Justice

Question 18

United States v. Simon

Answer 18

Criminal Liability

Question 19

Statutory Law

Answer 19

Laws that have been passed by the U.S. Congress and other governmental units

Question 20

Common Law

Answer 20

Laws that have been developed through court decisions rather than through gov.