Exam 3: Legal Liability

What are the 6 major factors contributing to the high number of lawsuits against pubic accountants and the high amounts in settlements being awarded to plaintiffs?

A) List the four items a defendant must prove in an action for negligence against a public accountant. B) Discuss what is meant by the term "expectation gap."

Most of the major lawsuits against public accounting firms have dealt with

If the public accountant negligently failed to properly prepare and file a client's tax return, the public accountant can be held liable for

To succeed in an action against the auditor, the client must be able to show that

Describe each of the six defences a public accounting firm can normally use when facing legal claims by clients.

According to the CPA Handbook, the auditor's responsibility for failure to detect fraud arises

An auditor would be found negligent if he/she

In rare cases, auditors have been held liable for criminal acts. A criminal conviction against an auditor can result only when it is demonstrated that the auditor

The Ultramares doctrine is that ordinary negligence is insufficient for liability of auditors to third parties because of the lack of privity of contract between the third party and the auditor. What type of behaviour on the part of an auditor would result in liability to more general third parties according to this doctrine?

An example of an audit failure is when the

There are four major sources of auditors' legal liability. Briefly summarize the four sources.

In third party suits, when there is a misstatement in the financial statements, which of the auditor's defences usually means non-reliance on the financial statements by the user?

Conflict between financial statement users and auditors often arises because of the

The assessment against a defendant of the full loss suffered by a plaintiff regardless of the extent to which other parties shared in the wrongdoing is called

In connection with the examination of financial statements, an auditor could be responsible for failure to detect a material fraud if

Sandra is a new partner at a PA firm. Sandra recently signed a new contract with Gretchen Fabrics to become its auditor. In the process of accepting the client and planning the first year's audit, Sandra did the following: - Sandra contacted the previous auditor to enquire if there were any reasons not to accept the audit of this client. Unfortunately, the previous auditor was on vacation and did not respond to Sandra before she accepted the client. - Upon his return, the previous auditor did communicate with Sandra and indicated that the client had aggressive expense deferral policies that they disagreed on. Sandra asked to review the working papers of the previous auditor with regards to these expenses and found them to be right below the materiality threshold. - Gretchen Fabrics imports most of its fabrics and has two production facilities in Asia. The company therefore has a complex tax structure and many import duties. Since this is not the area of expertise of Sandra, she asked another auditing firm to provide the required audit procedures for the international taxes and duties expense. When selecting the other audit firm, Sandra researched the firm online. She also ensured that they had their professional designation and enquired with the CPA and provincial association if the firm had any complaints or litigation outstanding for malpractice. - Since the bidding process took time, Sandra had to start the audit almost right after learning she had the winning bid. She did not prepare an engagement letter before starting the work. She does not see this as being a problem since waiting until the audit has begun will provide her with a better idea of what work has to be done and what the engagement letter should include. Required: Identify the good and bad steps that Sandra has undertaken in reducing her exposure to legal liability.

One of the lessons learned from accounting scandals such as Enron's is that generally accepted accounting principles (now under an acceptable financial reporting framework) cannot be relied upon exclusively in deciding whether financial statements are fairly presented. Why is this the case?

Which of the following lawsuits resulted in a decision that shareholders could not sue the auditors for the loss in the value of their shares?

Winston Chang, a PA, conducted the audit of Manra Manufacturing Ltd., a small company that produces a variety of machined parts for the automotive and computer industries. The audit showed that the company produced a small profit after paying the owners of the company a high salary. Manra was purchased by a competitor, Cheblay. Cheblay had hoped to produce efficiencies by combining the two companies but was unable to do so. Cheblay sued Chang because it relied upon the financial statements when purchasing the company's shares, claiming that the machines, which were about fifteen years old, had been overvalued. The machines were recorded at cost, which was below net realizable value. What is the auditor's best defence?