Professional Documents
Culture Documents
Chapter 4
Chapter 4
Chapter 4
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Learning Objective 1
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Changed Legal Environment
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Changed Legal Environment
Major contributors:
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Learning Objective 2
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Business Failure, Audit Failure,
and Audit Risk
➢ Business failure
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Business Failure, Audit Failure,
and Audit Risk
➢ Audit failure
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Business Failure, Audit Failure,
and Audit Risk
➢ Audit risk
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Learning Objective 3
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Legal Concepts Affecting
Liability
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Legal Terms Affecting
CPAs’ Liability
Terms related to negligence and fraud:
➢Ordinary negligence
➢Gross negligence
➢Constructive fraud
➢Frau
d
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Legal Terms Affecting
CPAs’ Liability
Contract Law
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Legal Terms Affecting
CPAs’ Liability
Other terms:
➢ Common law
➢ Statutory law
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Learning Objective 4
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Four Major Sources of Auditors’
Legal Liability
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Liability to Clients
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Auditor’s Defenses Against
Client Suits
➢Lack of duty to perform
➢Nonnegligent
performance
➢Contributory negligence
➢Absence of causal
connection
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Learning Objective 5
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Liability to Third Parties Under
Common Law
Ultramares Foreseen
doctrine users
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Foreseen Users
➢ Credit alliance
➢Restatement of torts
➢Foreseeable user
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Auditor Defenses Against
Third-Party Suits
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Learning Objective 6
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Securities Act of 1933
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Rule 10b-5 of the Securities
Exchange Act of 1934
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SEC Sanctions
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Foreign Corrupt
Practices Act of 1977
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Sarbanes-Oxley Act of 2002
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Criminal Liability
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Sarbanes-Oxley Act
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Auditor Defenses –
1933 & 1934 Acts
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Learning Objective 8
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The Profession’s Response
to Legal Liability
➢ Research in auditing
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The Profession’s Response
to Legal Liability
➢ Oppose lawsuits
➢ Education of users
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Protecting Individual CPAs
from Legal Liability
Qualified
Honest Clients
Personnel
Follow
Maintain
Professio
Independe
nal
nce
Standards
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Protecting Individual CPAs
from Legal Liability
➢ Understand the client’s business
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Protecting Individual CPAs
from Legal Liability
➢ Carry adequate insurance
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End of Chapter 4
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