Brain Teaser Questions:

True/False Statements:

Statements T/F
1. Under common law, an auditor may be held liable to clients for a breach of FALSE
contract but not for action in tort.
2. In an audit engagement, the auditor is in privity of contract with the client as an TRUE
independent contractor.
3. Ordinary negligence is a failure to use even slight care in the circumstances. FALSE
4. The auditor’s primary defence under common law is the exercise of due care and TRUE
management’s contributory negligence.

Brain Teaser Home Work:

 AUDITOR DEFENSE
(1) The auditor exercised
due professional care in accordance
with the contract.
(2) The client was contributory
negligent.
(3) The client’s losses were not
caused by the breach.
TO PREVAIL NEGLIGENCE, PLAINTIFF
MUST PROVE
(1) They suffered a loss;
(2) The loss was due to reliance on
misleading financial statements;
(3) The auditor knew, or should
have known, that the financial
statements were misleading.
AUDITOR DEFENCES TO ALLEGATION OF BREACH
OF CONTRACT
1. I did not breach the contract.
2. The losses were not caused by the breach.
Something else. Client has to prove damages
were caused by the breach.
3. The client was contributory negligent.
BREACH ACTIONS:
(1) Violating client confidentiality; 1. Breach of Contract
(2) Failing to provide the audit
report on time; A breach of contract occurs
(3) Failing to discover a material when an auditor fails to
error or employee fraud perform a contractual duty.
(4) Withdrawing from an audit
engagement without justification.
5 CONDITIONS TO BE LIABLE
(1) The auditor owes a duty of care to the plaintiff 2. Negligence
to conform to a required standard of care; (only negligent act regarded as
(2) Breach of duty of care to the plaintiff on the breach in the duty of care)
part of the auditor
(3) Causal relationship or connection between failure to exercise a reasonable
auditor’s negligence and plaintiff damage; level of care which later causes
(4) Plaintiff suffers actual loss or damage, damage to another parties CAUSES OF LEGAL
(5) It is fair, just and reasonable for the court to ACTION AGAINST
impose a liability on the auditor. AUDITOR
3. Gross Negligence
failure to exercise even a
minimal level of care (reckless
disregard) but without intent
to harm or damage anyone
1. COMMON LAW
4. Fraud
includes liability concepts which
are developed through court
intentional
decisions based on negligence,
concealment or
gross negligence, or fraud.
misrepresentation of material
facts that cause damages to
those deceived.
4 MAJOR SOURCES OF AUDITOR'S LEGAL
LIABILITIES
(1) Liability to clients
(2) Liability to 3rd parties under common law
(3) Civil liability under securities law
(4) Criminal liability
NOT LIABLE IF CAN PROVE
(1) They have withdrawn their consent before the
prospectus was lodged with the SC.
(2) The prospectus was issued without their knowledge or 1. CRIMINAL OFFENCES
consent, or they have been given public notice after they
became aware of the issue. occur when individuals or
(3) They have withdrawn their consent before the organisations breach a
allotment or sale of shares, after becoming aware of the government imposed law; in
untrue statement, and have given public notice of the other words criminal law
withdrawal. governs relationships
(4) They were competent in making the statement and AUDITOR’S between entities and the
TYPES OF LIGITATION TYPES OF LIABILITY state
have reasonable grounds to believe that the statement is
LEGAL LIABILITY
true. 2. STATUTORY LAW
2. CIVIL OFFENCES
includes liability which is based
OTHER ACTIONS BY FIRM TO MIN LIABILITY AND ENSURE
on federal securities laws or in contrast, deals with
QUALITY
state statutes. Among the most disputes between individuals
important of these statutes to and/or
(1) Issuing engagement letters;
the auditing profession in organisations.
(2) Making appropriate client acceptance/continuance
Malaysia is the Companies Act
decisions;
2016.
(3) Evaluating the audit firm’s limitations; and
(4) Maintaining high-quality audit documentation
I.E OF WAYS AUDITOR AND ACCOUNTANTS MIN POTENTIAL
LIABILITY
(1) Periodic rotation of audit engagement partner
(2) Prohibit certain non-audit services for public company
audit clients
(3) Restrict other non-audit services for audit clients
(4) Exercise professional skepticism
(5) Deal only client with high integrity
(6) Maintain independence
CAUSE FOR SUING UNDER CONTRACT LAW
1. Failing to complete the work engagement within agree CONTRACT LAW
upon time specified in the engagement letter.
2. Withdraw from the engagement without sufficient When auditor fails to meet the
justification. term of the engagement.
3. Violating client confidentiality.
4. Failing to provide professional quality work.