Auditing and assurance services 14e by arens chapter 05

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Legal Liability Chapter http://www.authorstream.com/shengv n/ ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-1 Learning Objective Understand the litigious environment in which CPAs practice ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-2 Changed Legal Environment Audit professionals have a contractual responsibility with clients Auditors are liable for negligence The number of lawsuits and sizes of awards remain high ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-3 Changed Legal Environment Major contributors: Growing awareness by financial statement users  Increased consciousness of the SEC  Complexity in business drives complexity in auditing and accounting functions  Litigious society ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-4 Changed Legal Environment Major contributors (cont.): Large civil court judgments against CPA firms  Willingness of CPA firms to settle out of court  Judges’ and jurors’ difficulty in understanding technical accounting and auditing matters ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Explain why the failure of financial statement users to differentiate among business failure, audit failure, and audit risk has resulted in lawsuits ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-6 Business Failure, Audit Failure, and Audit Risk  Business failure A business is unable to meet its obligations or investor expectations due to economic or business conditions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-7 Business Failure, Audit Failure, and Audit Risk  Audit failure Auditor issues an incorrect opinion from a failure to follow GAAS ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-8 Business Failure, Audit Failure, and Audit Risk  Audit risk The risk that the auditor fails to find a material misstatement and issues an unqualified opinion ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-9 Learning Objective Use the primary legal concepts and terms concerning accountants’ liability as a basis for studying legal liability of auditors ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 10 Rule 10b-5 of the Securities Exchange Act of 1934 Section 10 and rule 10b-5 are often called the antifraud provisions of the 1934 act “Scienter” states that auditors must have the knowledge and intent to deceive in order to be liable for violation of Rule 10b-5 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 26 SEC Sanctions SEC can sanction or suspend practitioners SEC has temporarily suspended a number of individual CPAs from auditing SEC clients ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 27 Foreign Corrupt Practices Act of 1977 Bribing a foreign official for the purpose of exerting business related influence is illegal ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 28 Sarbanes-Oxley Act of 2002 CEO and CFO are required to certify financial statements filed with the SEC Management must report on the effectiveness of internal controls over financial reporting Auditors must opine on internal controls over financial reporting ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 29 Learning Objective Specify what constitutes criminal liability for accountants ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 30 Criminal Liability ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 31 Sarbanes-Oxley Act This act makes it a felony to destroy or create documents to impede or obstruct a federal investigation ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 32 Auditor Defenses – 1933 & 1934 Acts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 33 Learning Objective Describe what the profession and the individual CPA can and what is being done to reduce the threat of litigation ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 34 The Profession’s Response to Legal Liability  Research in auditing Standard and rule setting Set requirements to protect auditors Establish peer review requirements ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 35 The Profession’s Response to Legal Liability  Oppose lawsuits  Education of users  Sanction members for improper conduct and performance  Lobby for changes in laws ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 36 Protecting Individual CPAs from Legal Liability Honest Clients Follow Professional Standards ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Qualified Personnel Maintain Independence - 37 Protecting Individual CPAs from Legal Liability  Understand the client’s business Perform quality audits Document the work properly Obtain an engagement and a representation letter Maintain confidential relations ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 38 Protecting Individual CPAs from Legal Liability  Carry adequate insurance Seek legal counsel Choose a form of organization with limited liability Exercise professional skepticism ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 39 End of Chapter ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley - 40 ... settle out of court  Judges’ and jurors’ difficulty in understanding technical accounting and auditing matters ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 5-5 Learning... Complexity in business drives complexity in auditing and accounting functions  Litigious society ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 5-4 Changed Legal Environment... lawsuits and sizes of awards remain high ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 5-3 Changed Legal Environment Major contributors: Growing awareness by financial
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