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FRANCESCA PEDERCINI MIT151043

WEEK 4 HOMEWORK

4.1) Litigation costs are the largest single cost faced by

auditing firms.
FALSE Litigation cost are expensive for auditing firms as it result
in:
Monetary losses
Consume of time
Loss of reputation
However, litigations cost are the second highest costs, after
employee compensations costs.
4.4) Negligence occurs when a person fails to perform a
contractual duty.
FALSE Negligence occurs when a person fails to exercise
reasonable care, thereby causing harm to another party or to
property. Breach of contract occurs when a person fails to perform a
contractual duty that has not been excused. For audit firms, parties
to a contract include clients and designated third-party
beneficiaries.
4.5) Examples of breach of contract include violating client
confidentiality, failing to provide the audit report on time,
and failing to discover material error or employee fraud.
TRUE. These are all elements specified in the engagement letter
signed by both auditor and client. Another examples of breach of
contract is withdrawing from an audit engagement without
justification.
4.6) To win a claim against the auditor, third parties suing
under common law must generally prove that they suffered
a loss, that the loss was due to lack of reliance and
misleading financial statement, and that the auditor
knowingly participated in the financial misrepresentation.
TRUE. In order for a third party to prevail in a case, there are a
number of things they must prove. First, the third party must prove
that the auditor had a duty to exercise due care. Second, the third
party must prove that the auditor breached that duty knowingly.
Third, the third party must prove that the auditor's breach was the
direct reason for the loss. Finally, the third party must prove that
they suffered an actual loss.
There are different approach used stated under the common law
(and used by the court) to decide if the auditors duty actually
extended to the third party:

Ultramares (known user) approach: Third party beneficiary

test
Expansion of ultramares: identify user test
Foreseeability and negligence

FRANCESCA PEDERCINI MIT151043

WEEK 4 HOMEWORK

Restatement of Torts (foreseen user) approach

Rosenblum (foreseeable user) approach

4.10) In rights theory, the highest order rights are those

granted by the government, such as civil rights, legal rights,
rights to own property, and license privileges.
FALSE In the right theory, the highest order rights include the right
to life, to autonomy, and to human dignity. The one above
mentioned belong to the Second-order rights.
4.12) An auditors independence would be considered to be
impaired if his or her immediate family member were
employed by the audit client in any capacity or personnel
level.
FALSE. An auditors independence would be considered to be
impaired if his or her immediate family member were employed by
the audit client in a KEY POSITION in which he or she can exercise
influence over the contents of the financial statements.
4.22) Which of the following statements related to the rights
theory is true?
a. The highest order rights include the right to life, autonomy,
and human dignity.
b. Second-order rights include rights granted by the government,
such as, civil rights and legal rights.
c. Third-order rights include social rights, such as the right to
higher education, to good health care, and to earning a living.
d. Fourth-orders. Rights include ones nonessential interests of
personal tastes.
e. All of the above.
4.24) Which of the following statements is false?
a. An auditor in public practice shall be independent in the
performance of professional services.
b. In performing audit services, the auditor shall maintain
objectivity and integrity, be free of conflict of interests, and
not knowingly misrepresent facts or subordinate his or her
judgement to others.
c. In performing audit services, the auditor may accept
contingent fees for publicly traded audit clients.
Contingent fee are not allowed as it can create a conflict of
interest (self-interest threat) for an auditor. In fact,
Contingent fee means a fee calculated on a predetermined
basis relating to the outcome of a transaction or the result
of the services performed by the Firm.

FRANCESCA PEDERCINI MIT151043

WEEK 4 HOMEWORK

d. An auditor in public practice shall not seek to obtain clients by

advertising or other forms of solicitation in a manner that is
false, misleading, or deceptive.