Exam 5: Legal Liability

The basic legal concept which was affirmed in the 1986 New York case, Credit Alliance, was that

Distinguish between what is meant by business failure and audit failure.

Fraud occurs when

The Private Securities Litigation Reform Act of 1995 capped damage awards against auditors to the amount of the audit fees charged.

In order to protect themselves from legal liability, it is important that CPAs

Auditors do not face legal exposure related to their client's filings of Form 10-Q quarterly information or Form 8-K unusual events with the Securities and Exchange Commission like they do for annual report filings under the Securities Exchange Act of 1934.

Under common law, CPAs have the right to withhold information from the courts on the grounds that such information is privileged.

The King Surety Company wrote a general fidelity bond covering thefts of assets by the employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled $17,200 of company funds. When the activities were discovered, King paid Wilson the full amount in accordance with the terms of the fidelity bond, and then sought recovery against Wilson's auditors, Lynch & Merritt, CPAs. Which of the following would be Lynch & Merritt's best defense?

The term "business failure" has basically the same meaning as "audit failure" as they pertain the auditing profession.

Under the Ultramares doctrine, ordinary negligence is insufficient for liability to third parties unless the third party is

Several states have statutes that permit privileged communication between the client and auditor, allowing a CPA to refuse to testify in state and federal courts.

The standard of due care to which the auditor is expected to adhere to in the performance of the audit is referred to as the

The standard of due care to which the auditor is expected to be held is referred to as the prudent person concept.

Which of the following is an illustration of liability under the federal securities acts?

In which case were auditors prosecuted for filing false financial statements for a client with the government?

The Credit Alliance approach to the concept of foreseen users states that to be liable to third parties, an auditor (1) must know and intend that the work product would be used by the third-party for a specific purpose, and (2) the knowledge and intent must be evidenced by the auditor's conduct.

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

The laws that have been developed through court decisions are called

Even if the auditor conducts an audit properly, the auditor can be held legally responsible if subsequently there are undiscovered misstatements in the financial statements.

Auditors have generally not been held liable for criminal acts in the courts.