阿伦斯 审计学一种整合的方法 课后习题答案ch05.docx
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阿伦斯审计学一种整合的方法课后习题答案ch05
Chapter5
LegalLiability
ReviewQuestions
5-1SeveralfactorsthathaveaffectedtheincreasednumberoflawsuitsagainstCPAsare:
1.Thegrowingawarenessoftheresponsibilitiesofpublicaccountantsonthepartofusersoffinancialstatements.
2.
3.AnincreasedconsciousnessonthepartoftheSECregardingitsresponsibilityforprotectinginvestors'interests.
4.
5.Thegreatercomplexitiesofauditingandaccountingduetotheincreasingsizeofbusinesses,theglobalizationofbusiness,andtheintricaciesofbusinessoperations.
6.
7.Society'sincreasingacceptanceoflawsuits.
8.
9.LargecivilcourtjudgmentsagainstCPAfirms,whichhaveencouragedattorneystoprovidelegalservicesonacontingentfeebasis.
10.
11.ThewillingnessofmanyCPAfirmstosettletheirlegalproblemsoutofcourt.
12.
13.Thedifficultycourtshaveinunderstandingandinterpretingtechnicalaccountingandauditingmatters.
14.
5-2ThemostimportantpositiveeffectsaretheincreasedqualitycontrolbyCPAfirmsthatislikelytoresultfromactualandpotentiallawsuitsandtheabilityofinjuredpartiestoreceiveremunerationfortheirdamages.Negativeeffectsaretheenergyrequiredtodefendgroundlesscasesandtheharmfulimpactonthepublic'simageoftheprofession.Legalliabilitymayalsoincreasethecostofauditstosociety,bycausingCPAfirmstoincreasetheevidenceaccumulated.
5-3Businessfailureistheriskthatabusinesswillfailfinanciallyand,asaresult,willbeunabletopayitsfinancialobligations.Auditriskistheriskthattheauditorwillconcludethatthefinancialstatementsarefairlystatedandanunqualifiedopinioncanthereforebeissuedwhen,infact,theyaremateriallymisstated.
Whentherehasbeenabusinessfailure,butnotanauditfailure,itiscommonforstatementuserstoclaimtherewasanauditfailure,evenifthemostrecentlyissuedauditedfinancialstatementswerefairlystated.Manyauditorsevaluatethepotentialforbusinessfailureinanengagementindeterminingtheappropriateauditrisk.
5-4Theprudentpersonconceptstatesthatapersonisresponsibleforconductingajobingoodfaithandwithintegrity,butisnotinfallible.Therefore,theauditorisexpectedtoconductanauditusingduecare,butdoesnotclaimtobeaguarantororinsureroffinancialstatements.
5-5Thedifferencebetweenfraudandconstructivefraudisthatinfraudthewrongdoerintendstodeceiveanotherpartywhereasinconstructivefraudthereisalackofintenttodeceiveordefraud.Constructivefraudishighlynegligentperformance.
5-6ManyCPAfirmswillinglysettlelawsuitsoutofcourtinanattempttominimizelegalcostsandavoidadversepublicity.ThishasanegativeeffectontheprofessionwhenaCPAfirmagreestosettlementseventhoughitbelievesthatthefirmisnotliabletotheplaintiffs.ThisencouragesotherstosueCPAfirmswheretheyprobablywouldnottosuchanextentifthefirmshadthereputationofcontestingthelitigation.Therefore,out-of-courtsettlementsencouragemorelawsuitsand,inessence,increasetheauditor'sliabilitybecausemanyfirmswillpayeventhoughtheydonotbelievetheyareliable.
5-7Anauditor'sbestdefenseforfailuretodetectafraudisanauditproperlyconductedinaccordancewithauditingstandards.SAS99(AU316)statesthattheauditorshouldassesstheriskofmaterialmisstatementsofthefinancialstatementsduetofraud.Basedonthisassessment,theauditorshoulddesigntheaudittoprovidereasonableassuranceofdetectingmaterialmisstatementsduetofraud.SAS99alsostatesthatbecauseofthenatureoffraud(includingdefalcations),aproperlydesignedandexecutedauditmaynotdetectamaterialmisstatementduetofraud.
5-8Contributorynegligenceusedinlegalliabilityofauditorsisadefenseusedbytheauditorwhenheorsheclaimstheclientoruseralsohadaresponsibilityinthelegalcase.Anexampleistheclaimbytheauditorthatmanagementknewofthepotentialforfraudbecauseofweaknessesininternalcontrol,butrefusedtocorrectthem.Theauditortherebyclaimsthattheclientcontributedtothefraudbynotcorrectingmaterialweaknessesininternalcontrol.
5-9Anengagementletterfromtheauditortotheclientspecifiestheresponsibilitiesofbothpartiesandstatessuchmattersasfeearrangementsanddeadlinesforcompletion.Theauditormayalsousethisasanopportunitytoinformtheclientthattheresponsibilityforthepreventionoffraudisthatoftheclient.Awell-writtenengagementlettercanbeusefulevidenceinthecaseofalawsuit,giventhattheletterspellsoutthetermsoftheengagementagreedtobybothparties.Withoutanengagementletter,thetermsoftheengagementareeasilydisputed.
5-10Liabilitytoclientsundercommonlawhasremainedrelativelyunchangedformanyyears.IfaCPAfirmbreachesanimpliedorexpressedcontractwithaclient,thereisalegalresponsibilitytopaydamages.Traditionallythedistinctionbetweenprivityofcontractwithclientsandlackofprivityofcontractwiththirdpartieswasessentialincommonlaw.Thelackofprivityofcontractwiththirdpartiesmeantthatthirdpartieswouldhavenorightswithrespecttoauditorsexceptinthecaseofgrossnegligence.
ThatprecedentwasestablishedbytheUltramarescase.InrecentyearssomecourtshaveinterpretedUltramaresmorebroadlytoallowrecoverybythirdpartiesifthosethirdpartieswereknownandrecognizedtoberelyingupontheworkoftheprofessionalatthetimetheprofessionalperformedthe
5-10(continued)
services(foreseenusers).StillothershaverejectedtheUltramaresdoctrineentirelyandhaveheldtheCPAliabletoanyonewhoreliesontheCPA’swork,ifthatworkisperformednegligently.Theliabilitytothirdpartiesundercommonlawcontinuesinastateofuncertainty.InsomejurisdictionstheprecedenceofUltramaresisstillrecognizedwhereasinothersthereisnosignificantdistinctionbetweenliabilitytothirdpartiesandtoclientsfornegligence.
5-11Inrecentyearstheauditor'sliabilitytoathirdpartyhasbecomeaffectedbywhetherthepartyisknownorunknown.Nowaknownthirdparty,undercommonlaw,usuallyhasthesamerightsasthepartythatisprivytothecontract.Anunknownthirdpartyusuallyhasfewerrights.TheapproachfollowedinmoststatesistheRestatementofTortsapproachtotheforeseenusersconcept.UndertheRestatementofTortsapproach,foreseenusersmustbemembersofareasonablylimitedandidentifiablegroupofusersthathavereliedontheCPA’swork,eventhoughthosepersonswerenotspecificallyknowntotheCPAatthetimetheworkwasdone.
5-12Thedifferencesbetweentheauditor'sliabilityunderthesecuritiesactsof1933and1934arebecausethe1933actimposesaheavierburdenontheauditor.Thirdpartyrightsaspresentedinthe1933actare:
1.Anythirdpartywhopurchasessecuritiesdescribedintheregistrationstatementmaysuetheauditor.
2.
3.Thirdpartyusersdonothavetheburdenofproofthattheyreliedonthefinancialstatementsorthattheauditorwasnegligentorfraudulentindoingtheaudit.Theymustonlyprovethatthefinancialstatementsweremisleadingornotfairlystated.
4.
Inconjunctionwiththesethirdpartyrights,theauditorhasagreaterburdeninthatheorshemustdemonstratethat:
1.Thestatementsarenotmateriallymisstated.
2.
3.Anadequateauditwasconducted.
4.
5.Theuserdidnotincurthelossbecauseofmisleadingfinancialstatements.
6.
Theliabilityofauditorsunderthe1934actisnotasharshasunderthe1933act.Inthisinstance,theburdenofproofisonthirdpartiestoshowthattheyreliedonthestatementsandthatthemisleadingstatementswerethecauseoftheloss.
Theprincipalfocusofaccountants’liabilityunderthe1934actisonRule10b-5.UnderRule10b-5,accountantsgenerallycanonlybeheldliableiftheyintentionallyorrecklesslymisrepresentinformationintendedforthird-partyuse.Manylawsuitsinvolvingaccountants’liabilityunderRule10b-5haveresultedinaccountantsbeingliablewhentheyknewalloftherelevantfacts,butmerelymadepoorjudgments.Inrecentyears,however,courtshavedecidedthatpoorjudgmentdoesn’tnecessarilyprovefraudonthepartoftheaccountant.
5-13Theauditor'slegalliabilitytotheclientcanresultfromtheauditor'sfailuretoproperlyfulfillhisorhercontractforservices.Thelawsuitcanbeforbreachofcontract,whichisaclaimthatthecontractwasnotperformedinthemanneragreedupon,oritcanbeatortactionfornegligence.Anexamplewouldbetheclient'sdetectionofamisstatementinthefinancialstatements,whichwouldhavebeendiscoverediftheauditorhadperformedallauditproceduresrequiredinthecircumstances(e.g.,misstatementofinventoryresultingfromaninaccuratephysicalinventorynotproperlyobservedbytheauditor).
Theauditor'sliabilitytothirdpartiesundercommonlawresultsfromanylossincurredbytheclaimantduetorelianceuponmisleadingfinancialstatements.Anexamplewouldbeabankthathasloansoutstandingtoanauditedcompany.Iftheauditreportdidnotdisclosethatthecompanyhadcontingentliabilitiesthatsubsequentlybecamerealliabilitiesandforcedthecompanyintobankruptcy,thebankcouldproceedwithlegalactionagainsttheauditorsforthematerialomission.
CivilliabilityundertheSecuritiesActof1933providestherightofthirdpartiestosuetheauditorfordamagesifaregistrationstatementoraprospectuscontainsanuntruestatementofamaterialfactoromitstostateamaterialfactth