Chapter 4 - CPA's Liability

Question 1

CPA’s Liability is determined by what areas of the law?

Answer 1

Common Law, Statutory Laws, Federal Statutes (31933 1934 Acts, Criminal Statues.

Question 2

What statues can direct users of financial statements sue a client and auditor?

Answer 2

Common Law and Statutory Law

Question 3

What areas of law expanded CPA’s liability to subsequent purchasers of stock?

Answer 3

1933 & 1934 Acts

Question 4

To establish that an Auditor breach his duty what does the client need to prove?

Answer 4

1- There was a specific duty or standard that the auditor did not comply with in performing his obligations.
2- The Auditor breached his duty
3- The users of the financial statements incurred a loss
4- Causation - Damage caused by Auditors breach of his duty.

Question 5

What is the best defenses an auditor has to being sued by the user of the financial statement and the auditor’s opinion?

Answer 5

1- Auditor performed his duty in accordance with the industry standard of due professional care.
2- Contributory Negligence - The Client withheld information from the auditor.

Question 6

What are some of the best practices that auditors use to protect themselves?

Answer 6

Engagement letters
Liability Insurance
Assess Risk of Material Misstatement
Know the business and client environment

Question 7

If a CPA does not perform his audit work required under the PCAOB and SAAS standards, and only relies on a Rep letter as the basis for his audit opinion is that fraud? If so, what kind of fraud?

Answer 7

Yes, Constructive fraud – does not involve a misrepresentation with intent to deceive (gross negligence).

Question 8

What act place limits on an auditor’s liability?

Answer 8

1934 Act Placed limits on amount of auditors’ liability by establishing proportionate liability.