Auditor Legal Liability

An example of a breach of contract would likely include

• an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees.

• an auditing firm's failure to complete an audit on the agreed-upon date because the firm had a backlog of other work which was more lucrative.

• a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been relied on in making a loan.

• an auditor's claim that the client staff is unqualified.

Privity of contract exists between

• auditor and third parties.

• auditor and client attorney.

• auditor and the federal government.

• auditor and client.

An individual who is not party to the contract between an auditor and the client, but who is known by both and is intended to receive certain benefits from the contract is known as

• a tort.

• a third-party beneficiary.

• a common law inheritor.

• a third party.

Fraud occurs when

• a misstatement is made and there is both knowledge of its falsity and the intent to deceive.

• the auditor lacks even slight care in the performance in performing the audit.

• the auditor has an absence of reasonable care in the performance of the audit.

• a misstatement is made and there is knowledge of its falsity but no intent to deceive.

A third-party beneficiary is one which

• does not have privity of contract and is unknown to the contracting parties.

• may establish legal standing before the court after a contract has been consummated.

• does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract.

• has failed to establish legal standing before the court.

The laws that have been developed through court decisions are called

• common laws.

• civil laws.

• statutory laws.

• criminal laws.

Which of the following is an accurate statement regarding audit risk, audit failure, and business failure?

• Audit risk is always avoidable if the audit is conducted in accordance with generally accepted auditing standards.

• A business failure will always result in an audit failure.

• Because auditors gather evidence on a test basis, and because well-concealed frauds are difficult to detect, audit risk is unavoidable.

• Legal precedent makes it easy to determine who has the right to recover losses in the event of an audit failure.

Which of the following factors does not explain why the number of lawsuits and the sizes of awards to plaintiffs in cases involving auditing firms remains high even today?

• Attorneys are willing to take these types of lawsuits on a contingent-fee basis.

• the deep-pocket concept of liability

• Economic changes often result in an increase in the number of business failures.

• All of the statements explain why the number of lawsuits and the sizes of the awards remain high.

In the performance of an audit, an auditing firm

• must exercise due professional care in the performance of their audit responsibilities.

• must exercise constructive professional care in the performance of their audit responsibilities.

• must strictly follow generally accepted accounting principles for privately held clients.

• is legally liable for detecting an immaterial client fraud.

Which of the following factors does not contribute to the number of lawsuits against auditors?

• the simplicity of auditing and accounting functions

• growing awareness of the responsibilities of public accountants by users of financial statements

• large civil court judgments against auditing firms awarded in a few cases

• an increased consciousness by the SC for its responsibility for protecting investors' interests