chap 5 legal concepts affecting liability

Question 1

T/F under common law, CPAs have the right to withhold info from the courts on the grouds that the info is privileged

Answer 1

F

Question 2

occurs when a misstatement is made and there is both the knowledge of its falsity and the intent to decieve

Answer 2

fraud

Question 3

laws that have been developed through court decisions rather than thru gov statutes?

Answer 3

common laws

Question 4

the auditor is expected only to conduct the audit with due care and is not expected to be perfect…what concept is this?

Answer 4

prudent person concept

Question 5

lack of even slight care , tantamount to reckless behavior, that can be expected of a person

Answer 5

gross negligence

Question 6

What is an example of a potential claim where the source of liability is criminal liability?

Answer 6

federal government prosecutes auditor for knowingly issuing an icorrect audit report

Question 7

What is an example of a potential claim where the source of liability is liability to third parties under common law?

Answer 7

bank sues auditor for not discovering that a borrowers FSs are materially misstated

Question 8

what is constructive fraud?

Answer 8

existence of extreme or unusual negligence even though there was no intent to deceive or harm . also called recklessness.

Question 9

absense of reasonable care that can be expected of a person in a set of circumstances?

Answer 9

ordinary negligence

Question 10

if a CPA fails to correctly prepare and file a clients tax return, the cpa can be held liable for what?

Answer 10

1. any penalties and interest that the client was required pay 2. the tax preparation fee charged 3. some cases can be punitive damanges

Question 11

what is an example of a 3rd party beneficiary?

Answer 11

a bank that will be relying ont he audited financial statements to make a decision regarding loan to the company involved in an audit

Question 12

what is a 3rd party beneficiary ?

Answer 12

a 3rd party who does not have privity of contract but is known to the contracting parties and is intended to have certain rights and benefits under the contract

Question 13

What is an example of a potential claim where the source of liability is liability to client?

Answer 13

Client sues auditor for not discovering a material fraud during the audit

Question 14

what are the 4 sources oa a auditors legal liability?

Answer 14

1. liability to clients 2. liablity to third parties under common law 3. civil liability under the federa securities laws 4. criminal liability

Question 15

what is common law?

Answer 15

laws that have been developed through court decisions rather than thru gov statutes

Question 16

when lawsuits are brought under the federal securities laws, which damage approach applies?

Answer 16

separate and proportiionate liability

Question 17

when lawsuits are brought under the federal securities laws, which damage approach applies when it can be shown the CPA defendant had actual knowledge of fraud or has participated in fraud?

Answer 17

joint and several liablility

Question 18

Failure of one or both parties in contract to fullfill the requirements of the contract?

Answer 18

breach of contract

Question 19

privity of contract?

Answer 19

when parties have a relationship that is established by a contract . this is what they have

Question 20

what is the prudent person concept?

Answer 20

the auditor is expected only to conduct the audit with due care and is not expected to be perfect

Question 21

laws that have been passed by U.S. Congress and other governmental units

Answer 21

statutory laws

Question 22

existence of extreme or unusual negligence even though there was no intent to deceive or harm . also called recklessness.

Answer 22

constructive fraud

Question 23

parties who have a relationship that is established by a contract are said to have what ?

Answer 23

privity of contract

Question 24

If the firm operates a a LLP , LLC, a general coprations, or a professional corporation with limitied liablility, the liability for one owners actions does not extend to another owners what? unless what?

Answer 24

personal assets the other owner was directly involved in the actions of the owner causing the liability

Question 25

what is gross negligence?

Answer 25

lack of even slight care , tantamount to reckless behavior, that can be expected of a person

Question 26

What are the 3 groups an auditor is most likely to rely on and to which the partners can be liable for the work of under the laws of agency?

Answer 26

1. employees 2. other CPA firms engaged to do part of the work 3. specialists called upon to provide technical information

Question 27

the assessment against a defendant of that portion of the damage caused by the defendants negligence

Answer 27

separate separate and proportionate liablity

Question 28

what would constructive fraud be in the case of an audit?

Answer 28

recklessness is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intention of deceiving FS users.

Question 29

some states have statutes that permit privelged communication between the client and auditor but the intent at the time of the communication must have been what? This privilege does not exented to what?

Answer 29

for the communication to remain confidential federal courts

Question 30

What is an example of a potential claim where the source of liability is civil liability under federal securities laws?

Answer 30

combined grouip of stockholder sues auditor for not discovering materially misstated FSs

Question 31

what is ordinary negligence? example for auditors?

Answer 31

absense of reasonable care that can be expected of a person in a set of circumstances. auditor- it is in terms of what other competent auditors would have done in the same situation

Question 32

what is separate separate and proportionate liablity?

Answer 32

the assessment against a defendant of that portion of the damage caused by the defendants negligence

Question 33

the assessment against a defendant of the full loss suffered by the plantiff , regardless of the extent to which other parties shared in the wrongdoing.

Answer 33

joint and several liability

Question 34

what is fraud ?

Answer 34

occurs when a misstatement is made and there is both the knowledge of its falsity and the intent to decieve

Question 35

what is breach of contract?

Answer 35

Failure of one or both parties in contract to fullfill the requirements of the contract

Question 36

a 3rd party who does not have privity of contract but is known to the contracting parties and is intended to have certain rights and benefits under the contract ?

Answer 36

a 3rd party beneficiary

Question 37

what is joint and several liability?

Answer 37

the assessment against a defendant of the full loss suffered by the plantiff , regardless of the extent to which other parties shared in the wrongdoing.

Question 38

what is statutory law?

Answer 38

laws that have been passed by U.S. Congress and other governmental units

Question 39

the damage approaches of joint and several liablility and separate and proportiionate liability are generally only applicable in what cases (2)

Answer 39

1. liability to third parties under common law 2. liablity under federal securities laws

Question 40

most majore lawsuits against CPA firms have dealth with what?

Answer 40

audited and unaudited FSs