Chapter 5 Assignment

Done By: Jeshaun Charles

1.) Discuss three major factors that have contributed to the recent increase in the number
of lawsuits against auditors and the size of awards to plaintiffs.

Three major factors that have contributed are growing awareness by the users of
financial statements, increase in consciousness by the SEC and complexity in business
drives complexity in both the auditing and accounting functions.

2.) Discuss each of the four defenses a CPA firm can normally use when facing legal
claims by clients. Which of these defenses is ordinarily not available against third-
party suits?

The four defenses a CPA firm can normally use when facing legal claims by clients
are:

1. Lack of Duty is where the CPA firm claims that there were no implied or
expressed contracts.

2. Nonnegligent Performance is where the CPA firm claims that the audit was
conducted in accordance with the auditing standards, even if there were
undiscovered misstatements.

3. Contributory Negligence exists when the auditor claims the client’s own
actions either resulted in the loss which is the main cause for damages or
interveined with the conduct of the audit in a way that prevented the auditor
from discovering the cause of the loss.

4. Absence of Casual Connection is where attempt to refute any connection

because for the client to be successful in filing a lawsuit against the auditor,
they must be able to show that there is a close causal connection between the
auditor’s failure to follow auditing standards and the damages suffered by the
client.

3.) Discuss the sanctions the Securities and Exchange Commission can impose on
auditors.

The Rules of Practice of the SEC would permit them to deny a CPA or CPA firm from
either being temporarily or permanently associated with financial statements for SEC
clients. It could be for something like engaging in unethical professional conduct.