Module C: Legal Liability Flashcards
breach of contract
A claim that accounting or auditing services were not performed in the manner described in the contract.
causation defense
An argument available to auditors who can show that a plaintiff’s economic loss was caused by a factor other than the auditors’ failure to exercise the appropriate level of professional care or breach of contract.
class action
A situation in which a group of plaintiffs comes together in a legal action against another party.
comfort letter
A letter issued by auditors to underwriters of securities that provides an opinion on the fairness of the issuers’ financial statements.
common law
The liability for injuries that is based on reasons other than violation of a written law or statute. Under common law, legal precedent is used in assessing the degree of responsibility or fault of the parties; auditors have common law liability to clients and non shareholder third parties.
constructive fraud
A failure to provide any care in fulfilling a duty owed to another including a reckless disregard for the truth (similar to gross negligence).
contributory negligence
A legal defense theory in which the plaintiff’s own failure to perform with the appropriate level of professional care bars recovery from auditors.
“deep pockets” theory
The concept that lawsuits may be brought against auditors not because they are necessarily at fault but because they are the only party with resources against which recovery can be made.
expectation gap
The difference between the actual work and assurance required by GAAS and the expectation of that work by the general public.
Financial Reporting Releases (FRRs)
Reports prepared by SEC staff that express new rules and policies about disclosure.
foreseeable party
The individuals or organizations whose decisions normally rely on audited financial statements and opinions on whose financial statements.
foreseen party
A limited class of individuals or organizations that could be reasonably expected to rely on auditors’ work.
Form 8-K
The “current events” report filed periodically at the occurrence of major events, such as earnings releases, major asset sales, acquisitions, and auditor changes.
Form 10-K
The form to use for annual filing of financial statements and related disclosures by public companies with the SEC.
Form 10-Q
The form to use for quarterly filing of financial statements and related disclosures by public companies with the SEC.
fraud
The misrepresentation of facts that the individual knows to be false with the intention of deceive.
gross negligence
The breach of duty owed to another party because of. lack of minimal care (similar to constructive fraud).
initial public offering (IPO)
The initial issuance of securities by a registrant entity to the investing public through a market that is subject to the provisions of the Securities Act of 1933.
joint and several liability
The legal doctrine that when multiple defendants are named, the full amount of a damage award may be collected from any of the defendants named in the lawsuit even though they may be only partially at fault.
limited liability partnership
A form of organization adopted by most large accounting firms that combines the advantages of a traditional partnership with the liability protection afforded to corporations.
ordinary negligence
The unintentional breach of duty owed to another as a result of a lack of reasonable care.
plaintiff
The person or organization that initiates a lawsuit (client or their-party user of financial statements).
primary beneficiary
A person known by name to the auditor for whose primary benefit the audit or other accounting service is performed.
privity of contract
A situation in which parties have a contractual relationship.
