Chapter 5 - Legal Liability Flashcards Preview

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Flashcards in Chapter 5 - Legal Liability Deck (20):
1

Business Failure

When a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions.

2

Audit failure

occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards.

3

Audit risk

represents the possibility that the auditor concludes after conducting an adequate audit that the FINS were fairly stated when, in fact they were materially misstated. Audit Risk is unavoidable!

4

Prudent Person

We are human, we make mistakes

5

Levels of Negligence to Fraud

1. Ordinary Negligence
2. Gross Negligence
3. Constructive Fraud
4. Fraud

6

Four Major sources of auditors legal liability

1. Clients
2. 3rd parties
3. Civil
4. Criminal

7

Defenses from clients

1. Lack of duty - First and least expensive
2. Contributory Negligence - push it back onto client
3. Absence of causal connection - some other event caused it
4. Non-negligent performance - last and best defense, also most expensive, Prove we are following GAAS/PCAOB

8

Defenses from 3rd parties

1. Credit alliance - Credit alliance v. Arthur Andersen
2. Restatement of torts - Reasonably limitd and identifiable group of users who have relied on the CPAs work.
3. Foreseeable users - Unlimited class
4. Ultra-mares Doctrine - has to be a primary user or beneficiary.

9

Cenco Incorporated v, Siedman & Siedman

Liability to Clients - Siedman & Siedman won using Contributory Negligence and pushed it onto Cenco's mgmt.

10

1136 Tenants v. Max Rothenberg and Co.

Liability to Clients - 1136 Tenants won because Max Rothenberg and Co. didn't look into the "missing invoices"

11

Ultra-mares Corporation v. Touche

Liability to Third Parties - Ultra-mares lost because they weren't primary beneficiaries.

12

Rusch Factors v. Levin

Liability to Third Parties - Levin lost because Rusch Factors was under the Restatement of torts

13

Credit Alliance v. Arthur Andersen

Liability to Third Parties - Arthur Andersen lost because Credit Alliance was a primary beneficiary

14

Escottet al. v. BarChris Construction Co.

Securities Act of 1933

15

Hachfelder v. Ernst & Ernst

Securities Act of 1934

16

Howard Sirota v. Solitron Devices

Securities Act of 1934

17

United States v. Andersen

Criminal Liability - Obstruction of Justice

18

United States v. Simon

Criminal Liability

19

Statutory Law

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

20

Common Law

Laws that have been developed through court decisions rather than through gov.