Auditing I: Chapter 4 Homework

Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following losses proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: Loss sustained by a bank known to the auditors to be relying on the financial statements for a loan; suit brought in a state court that adheres to the Credit Alliance v. Arthur Andersen precedent.

Liable

Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following losses proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: Loss sustained by a bank named as a third-party beneficiary in the engagement letter; suit brought under common law.

Liable

Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following losses proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: Loss sustained by a lender not in privity of contract; suit brought in a state court that adheres to the Rosenblum v. Adler precedent.

Liable

Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following losses proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: Loss sustained by client; suit brought under common law.

Liable

Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following losses proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: Losses to stockholders purchasing shares at a public offering; suit brought under the Securities Act of 1933.

Liable

Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following losses proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: Losses sustained by stockholders; suit brought under Sections 18(a) and 10(b) of the Securities Exchange Act of 1934.

Not liable

Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be "liable" or "not liable" for the following losses proximately caused by their negligence and determine that liability under the various theories discussed and followed by different states: Loss sustained by trade creditor, not in privity of contract; suit brought in a state court that adheres to the Ultramares v. Touche Co. precedent.

Not liable

Intent to deceive, manipulate, or defraud. This concept is used in the 1934 Securities Exchange Act to establish auditor liability.

Scienter

A federal securities statute covering registration statements for securities to be sold to the public.

Securities Act of 1933

If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for: a. Strict liability for all damages incurred. b. Gross negligence. c. Either ordinary or gross negligence. d. Breach of contract.

b.

Which of the following approaches to auditors' liability is least desirable from the CPA's perspective? a. The Ultramares approach b. The Rosenblum approach c. The Restatement of Torts approach d. The Forseen User approach

b.

Failure of one or both parties to a contract to perform in accordance with the contract's provisions.

breach of contract

Unwritten law that has developed through court decisions; it represents judicial interpretation of a society's concept of fairness.

common law

Performing duties with such recklessness that persons believing the duties to have been completed carefully are being misled. The person performing the duties does not have knowledge of misrepresentations within the financial statements.

constructive fraud

Misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with intent to deceive and with the result that another party is injured.

fraud

Violation of a legal duty to exercise a degree of care that an ordinarily prudent person would exercise under similar circumstances.

negligence

A method of allocating damages to each group that is liable according to that group's pro-rata share of any damages recovered by the plaintiff. For example, if the plaintiff was awarded a total of $500,000 and the CPAs were found to bear 30 percent of the responsibility for the damages, the CPAs would be assessed $150,000.

proportionate liability

Damage to another is directly attributable to a wrongdoer's act. This issue may be raised as a defense in litigation—that is, the defense may argue that some other factor caused the loss.

proximate cause

Written law created by state or federal legislative bodies.

statutory law