Common Law Duties and Liability to Client's and Third Parties

Question 1

Under a common law negligence suit

Answer 1

CPA escapes liability by showing that the audit was conducted in accordance with generally accepted auditing standards

Question 2

To prove common law fraud

Answer 2

a purchaser has to prove scienter/knowledge of the misstatements

Question 3

CPA Defenses to common law negligence to avoid liability are

Answer 3

1) The CPA was not negligent or fraudulent.
2) Contributory negligence of the client caused the loss.
3) The CPA adhered to GAAS and planned audit examination to search for material fraud.
4) The error was immaterial.
5) The proximate cause of loss was not the erroneous financial statements

Question 4

If financial reports are primarily for the benefit of a third party and the CPA is negligent in preparing the reports

Answer 4

The CPA may be held liable to Any foreseen or known third party who relied on the report

Question 5

Lack of privity is a viable defense in most jurisdictions

Answer 5

if the plantiff is a creditor of the client. Privity is not needed in fraud or negligence

Question 6

Audit workpapers

Answer 6

are not protected as privileged communication and may be subpoenaed

Question 7

A CPA may be held liable to clients for

Answer 7

fraud, negligence, or breach of contract

Question 8

In an Ultramares case

Answer 8

a third party who proves gross negligence will be able to prove that the CPA is guilty of fraud

Question 9

To establish negligence against the CPA, a client must show that

Answer 9

1) CPA owed a legal duty,
2) CPA breached that duty,
3) CPA’s action was the proximate cause of the resulting injury to the client
4) CPA’s actions caused the damage or loss