Chapter 5 – Legal Liability5 - *
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common law to fulfill implied or expressed
contracts with clients.
provide the services or not exercise due
care in their performance.
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of awards to plaintiffs remain high.
Despite efforts by the profession to
address the legal liability of CPAs…
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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statement users to differentiate
among business failure, audit
resulted in lawsuits.
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Business failure
repay its lenders or meet the
expectations of its investors because
of economic or business conditions.
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Audit failure
incorrect audit opinion because it
failed to comply with the requirements
of auditing standards.
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Audit risk
conclude that the financial statements
are fairly stated and an unqualified
opinion can be issued when, in fact,
they are materially misstated.
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and terms concerning accountants’
legal liability of auditors.
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Prudent person concept
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Ordinary negligence
Constructive fraud
Gross negligence
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Breach of contract
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Liability to third parties
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against CPAs is from clients.
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Nonnegligent performance
Contributory negligence
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and related defenses.
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Ultramares doctrine
Foreseen users
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and related defenses.
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Section 11 of the 1933 act defines the
rights of third parties and auditors.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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centers on the audited financial statements
issued to the public in annual reports or
submitted to the SEC as a part of
annual Form 10-K reports.
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Section 10 and rule 10b-5 are often called
the antifraud provisions of the 1934 act.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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to sanction or suspend practitioners from
doing audits for SEC companies.
In recent years, the SEC has temporarily
suspended a number of individual CPAs
from doing any audits on SEC clients.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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to an official of a foreign country for
the purpose of exerting influence and
obtaining or retaining business.
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certify the annual and quarterly financial
statements filed with the SEC.
Management must report its assessment
of the effectiveness of internal control
over financial reporting.
management’s assessment.
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criminal liability for accountants.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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or create documents to impede or
obstruct a federal investigation.
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the individual CPA can do and
what is being done to reduce
the threat of litigation.
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Establish peer review requirements
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and performance
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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Hire qualified personnel
Maintain independence
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Perform quality audits
Maintain confidential relations
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Exercise professional skepticism
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