Final Flashcards
6 Principles of Professional Ethics
Responsibilities The Public Interest Integrity Objectivity and Independence Due Care Scope and Nature of Services- auditors cannot do any other type of work besides audit
Examples of covered members
An individual on the attest engagement team- Can be rotated
Individual who may influence engagement (e.g., boss of engagement partner).
Other partners in engagement office- Can be rotated,
Certain partners and managers who provide nonattest services to the client
An accounting firm should not do these inappropriate things
Audit its’ own work.
Function as part of management or as an employee of the audit client.
Act as an advocate for the client.- Auditor should not defend the client or promote them
Bookkeeping services an auditor should not do
Prepare or originate source data underlying the financial statements.
Maintain or prepare client’s accounting records.
Prepare financial statements.
Limited Liability Partnerships (LLP)
Single layer of taxation, personal assets are safe unless partner was on the engagement
Most common form of organization
CPAs in Business- Applicable Rules
Integrity and Objectivity. General Standards Compliance with Standards Accounting Principles Acts Discreditable
CPAs in Business- Non applicable rules
Rules ordinarily not applicable: Independence Contingent fees Commissions and Referral Fees Advertising and Solicitation Confidential Client Information Form of Organization and Name
Statutory Law
Codified law written by a formal law making body- Congress
Common Law
Law created by judges during court cases- opinions written by judges because statutory is unclear. Law they make has precedence over future cases
Auditor legal strategies
Improve the quality of auditing.
Increasing insurance coverage
Reporting more conservatively-happens most often
Lobbying legislators for legal reform.
Being more selective in obtaining and retaining clients.
Get out of audit practices altogether to reduce liability exposure.
Many mid-sized firms stopped auditing publicly traded companies because they would not be able to handle a lawsuit.
Common Law- Liability to clients
Most frequent lawsuits against CPA’s
Lawsuits by the legal entity, not the shareholders
$ amount is generally small
Little publicity
Burden of proof- plaintiff, above 50%, more likely than not guilty
What does the plaintiff have to prove in a common law lawsuit? (By client or third parties)
.Duty—the CPA accepted a duty of care to exercise skill, prudence, and diligence. This is ordinarily easy to prove since by accepting an engagement a CPA assumes a responsibility to exercise due care.
Breach of duty—auditor violated contract
Loss—the client suffered a loss.
Proximate Cause— client must proved that they were harmed, and their loss was caused by auditors breach of duty
Ultramares Approach
Auditor not liable for ordinary negligence to a third party who was not in contractual privity, unless the third party was a third party beneficiary.
Audit must have been done for the third party to be liable for ordinary negligence, ex. For a bank to get a loan, and identity of 3rd party must be known
Restatement of Torts Approach
Audit must have been done for a third party, but identity of third party does not have to be known, Forseen Third Party
Rosenblum Approach
Auditor has duty to anyone they would have expected to use the financial statements, Forseeable third party
Right of Subrogation
This is a situation in which the third party “steps into the shoes of the client” recovery wise and can recover for ordinary negligence.
Statutory Law (1933)- Liability to Third Parties
Outlined situations where auditors would have to pay damages in court. Auditors can be sued for ordinary negligence
Purchasers of new securities may sue, auditors have burden of proof
Statutory Law (1934)- Liability to Third Parties
All buying and selling of securities
Third party investors may sue, plaintiff has burden of proof
Statutory Law (1934) burden of proof
Plaintiff must prove they had a loss, they relied on the financial statements, and the financial statements were misstated
Proportionate Liability versus Joint and Several Liability
Proportionate—20% liable, only pay 20% of damages.
Joint and several—20% liable can pay up to 100% if other defendants don’t have money. Everyone is liable for up to 100% of damages
Management representation letter and management letter
Management Representation Letter- written letter of representations summarizing the most important oral representations made during the year to auditor.
Management Letter- From the auditor to the client, makes recommendations. Not required but a professional courtesy
Engagement completion document
Formal document at the end of the audit, documents, disagreements with management
Date of audit report
Most important milestone
Rule: Cannot date the audit report sooner than obtained sufficient evidence to justify opinion. Last day of fieldwork
Phases of the audit
Interim Period
Subsequent Period- balance sheet date through date of audit report
Report Preparation Period- responsibility only covers subsequent events that come to their attention; client tells auditor or news story they see. They do not need to look for any events. Between date of the audit report and report release date
After Report-After report release date
