Lega∠ abilit It Takes the net profit from Many audits to offset the Cost of one lawsuit Arens Loebbecke Anding &E
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, 5 It Takes the Net Profit From Many Audits to Offset the Cost of One Lawsuit
CHANGED LEGAL ENVROMMENT Understand the litigious environment in which CPAs practice Audit professionals have a responsibility under common law to fulfill implied or expressed contracts with clients. They are liable to their clients for negligence and/or breach of contract should they fail to provide the services or not exercise due care in their performance. L灬 boecker Andina&E
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Understand the litigious environment in which CPAs practice. CHANGED LEGAL ENVIRONMENT Audit professionals have a responsibility under common law to fulfill implied or expressed contracts with clients. They are liable to their clients for negligence and/or breach of contract should they fail to provide the services or not exercise due care in their performance
DISTINCTION AMONG BUSINESS FAILURE AUDIT FAILURE Explain why the failure of financial statement users to differentiate among business failure. aud it failure. and AUDIT RISK audit risk has resulted in lawsuits Business failure occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions Audit failure occurs when the auditorissues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards gaas). Audit risk- represents the risk that the auditor will conclude that the financialstatements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated. EVEN THOUGHIT WAS A WELL-CONDUCTED GAAS AUDIT Irens, Locbbecke: AuditiNg & E
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Explain why the failure of financial statement users to differentiate among business failure, audit failure, and audit risk has resulted in lawsuits. DISTINCTION AMONG BUSINESS FAILURE, AUDIT FAILURE, AUDIT RISK Business Failure - occurs when a businessis unable to repay its lenders or meet the expectations of its investors because of economic or business conditions. Audit Failure - occurs when the auditor issues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards (GAAS). Audit Risk - represents the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated. EVEN THOUGH IT WAS A WELL-CONDUCTED GAAS AUDIT!
Business Audit failures Risk △udit Failure
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Business Failures Audit Risk Audit Failure
LEGAL CONCEPISAFFECTINGLIABILITY Use the primary legal concepts and Prudent Person Concept(not perfection) the terms concerning accountants liability as a basis for studying legal Liability for the Acts of Others (LLP liability of auditors Lack of Privileged Communication(w/ps) Four Maior Sources of Auditors' Legal liability 1. Client -liability to client under common law 2. Third party -liability to third parties under common law 3. Liability under federal securities laws-SH suit 4. Criminal liability- Intent to deceive L灬 boecker Andina&E
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc, Use the primary legal concepts and the terms concerning accountants’ liability as a basis for studying legal liability of auditors. LEGAL CONCEPTS AFFECTING LIABILITY Prudent Person Concept (not perfection) Liability for the Acts of Others (LLP) Lack of Privileged Communication (w/p’s) Four Major Sources of Auditors’ Legal Liability 1. Client - liability to client under common law 2. Third party - liability to third parties under common law 3. Liability under federal securities laws – SH suit 4. Criminal liability – Intent to deceive