|

VIP

ch4

www.baidu.com

Principle of Auditing ...

19

Principle of Auditing ...

28

Principle of Auditing ...

13

Auditing Dictionary of...

33

Principle of Auditing ...

19

Auditing test bank ch...

45
1

Auditing test bank ch...

36
1

Auditing test bank c...

40
1

Auditing test bank ch...

40
1

Principle of Auditing Ch4

yaoyaolyf 2011-01-26 (13 ) 7181 173

Chapter
04 - Lega
l Liabilit

y of CPA
s
4-9

4-34

SOLUTI
ON: Th
omas &
Ross, CP

As (Esti
mated ti
me: 15
minutes)

(a)
(1)

Under c
ommon l
aw in a j
urisdicti

on that a
dheres to
the

Ultram
ares
doctrine
, the

stockhol
ders mus
t show th
at they i

ncurred l
osses, th
at the CP

As were
grossly
negligen
t, and th

at this gr
oss negli
gence w
as the pr

oximate
cause of
the stock
holders'

losses.
(2)

Under c
ommon l
aw, the d
efendant

is "presu
med inn
ocent un
til prove

n guilty,"
and
therefore
bears no

burden o
r affirma
tive proo
f. The a

uditors
will, ho
wever, i
ntroduce

evidence
refuting
the plain

tiffs' alle
gations.
(b)

(1)
In a suit
brought
under th

e Securit
ies Act o
f 1933, i
nitial pur

chasers
of the se
curity

must sho
w only t
hat they
had a los

s and tha
t the fina
ncial stat
ements

were mis
leading.
(2)

The audi
tors, in o
rder to a
void liab

ility, mu
st prove
either th
at they p

erformed
their
audit wit
h "due di

ligence"
(that is,
were not
negligen

t) or that
their neg
ligence
was not

the proxi
mate cau
se of the

plaintiffs
' losses.
(c)

(1)
In a suit
brought
under th

e Securit
ies Exch
ange Act
of 1934,

the plain
tiffs nor
mally

must pro
ve relian
ce upon t
he misle

ading fin
ancial st
atements
, as well

as that th
ey
sustaine
d a loss

and that
the state
ments w

ere misle
ading.
(2)

To avoid
liability,
the audit
ors must

prove eit
her that t
hey "act
ed in go

od faith"
(were
not gross
ly neglig

ent), and
that their
gross ne
gligence

was not t
he proxi
mate cau
se of

the plain
tiffs' loss
es.

4-35
SOLUTI
ON: Ch
arles Wo

rthington
, CPA (E
stimated

time: 20
minutes)

Craft has
stated th
at the CP
A firm h

as "revie
wed the
books an
d record

s of Flac
k Ventur
es," whe
n in

fact no s
uch "revi
ew" has
occurred

. A "rev
iew" of f
inancial
statemen

ts consis
ts of limi
ted

investiga
tory proc
edures d
esigned t

o provid
e statem
ent users
with a li

mited de
gree of a
ssurance
that

the finan
cial state
ments ar
e in conf

ormity w
ith gener
ally acce
pted acc

ounting
principle
s. Craft'
s

actions a
re simila
r to issui
ng an au

ditors' re
port with
out first
performi

ng an au
dit. Suc
h an acti
on may

well be c
onsidere
d an act
of crimi

nal fraud
, intende
d to misl
ead user

s of the f
inancial
statemen
ts. In

addition,
Craft's a
ctions vi
olate Rul

es 102, 2
02, and
501 of th
e AICPA

Code o
f Profe
ssional

Condu
ct
.

If the fin
ancial st
atements
of Flack

Ventures
turn out t
o be misl
eading, t

here is li
ttle doub
t that an
y

court wo
uld find t
he CPA f
irm guilt

y of at le
ast const
ructive f
raud and

liable to
any third
party wh
o

sustains
a loss as
a result o
f relianc

e upon t
he state
ments.

The fact
that Craf
t violate
d Worthi

ngton's p
olicy of
submitti
ng all re

ports for
Worthin
gton's

review
would n
ot lessen
the CPA

firm's lia
bility. T
he conce
pt of mut

ual agen
cy allow
s Craft, a
sa

partner, t
o commi
t the fir
m to con

tracts, in
cluding
auditors'
reports a

nd accou
ntants' re
ports. T
he fact

that this
report w
as not su
bmitted f

or Worth
ington's
review
might be

introduc
ed as evi
dence ag
ainst

Craft in t
he event
he is acc
used of c

riminal f
raud.

Chapter
04 - Lega
l Liabilit

y of CPA
s
4-10

4-36

SOLUTI
ON: Un
audited
Stateme

nts (Esti
mated ti
me: 30
minutes)

(a)
The com
pilation (

preparati
on) of fi
nancial s
tatement

s is quite
different
from an

audit, an
d it is
importan
t that the

client un
derstand
this. Or
al comm

itments,
such as t
elephone

conversa
tions,
can ofte
n be mis

understo
od and s
hould be
followed

up by a
written e
ngageme

nt letter
spelling
out the n
ature an

d limitati
ons of th
e service
s to be p

erformed
.
(b)

Even a r
egular a
udit can
not be re

lief upon
to disclo
se defalc
ations, a

nd in an
engagem
ent

involvin
g the co
mpilatio
n of una

udited fi
nancial s
tatement
s, the CP

As do no
t even pe
rform

any audi
t proced
ures. Th
e fact tha

t the CP
A intend
s to perf
orm no i

nvestigat
ive proc
edures

and will
rely upo
n the rep
resentati

ons of th
e managi
ng agent
should s

pecifical
ly be set
forth in

the writt
en engag
ement le
tter.

Of cours
e, if the
CPA has
reason to

suspect t
hat the r
epresent
ations of

the mana
ging
agent are
erroneou

s, the co
ncept of
due prof
essional

care req
uires tha
t she inf

orm her
client of
her reser
vations.

(c)
The wor
d "Audit

" should
be avoid
ed in ref
erring to

all engag
ements o
ther than
audits.

Otherwis
e, it may
appear t
hat the C

PAs hav
e led the
client to
believe t

hat they
were acti
ng as

auditors,
in which
case the
y may be

held acc
ountable
for cond
ucting th

eir work
in accor
dance

with gen
erally ac
cepted a
uditing s

tandards.
The CP
A should
explain t

his situat
ion to th
e

client an
d persua
de the cli
ent to ch

ange the
account t
itle to "
Accounti

ng Fees.
"
(d)

While D
ay does
not have
a respon

sibility t
o perfor
m audit
procedur

es when
compilin
g

unaudite
d financi
al statem
ents, he

does hav
e a respo
nsibility
to exerci

se due pr
ofession
al care.

This wo
uld inclu
de advisi
ng the cl

ient of a
ny situat
ion that
might su

ggest a p
roblem f
or the
client.

The CPA
should al
ert his cl
ient to th

e missin
g invoic
es in wri
ting and

advise th
e client
to follow
up on th

e matter,
or, if the
client wi
shes, the

CPA cou
ld invest
igate the

matter as
an
addition
al accou

nting ser
vice. Th
e key poi
nt is that

the CPA
must not
fail to al

ert the cl
ient to
the unde
rlying po

tential fo
r fraud.
4-37

SOLUTI
ON: Ma
rk Willia
ms, CPA

(Estimat
ed time:
20 minut
es)

(a)
CPAs as
members

of a prof
ession ar
e obligat
ed to exe

rcise due
professio
nal care.
Thus, a

CPA ma
y be held
liable to
the clien

t for the
damages
resulting
from the

CPA's or
dinary
negligen
ce.

Since Ja
ckson Fi
nancial
was the

client, Ja
ckson ca
n recove
r losses

proximat
ely caus
ed

by Willi
ams' neg
ligence.
It would

appear t
hat Jacks
on Finan
cial coul

d also re
cover th
e audit

fee as da
mages b
ecause o
f Willia

ms' brea
ch of co
ntract.

(b)
The first
argumen
t which

Williams
' attorne
y would
make is t

hat Apex
had no ri
ghts und
er the

contract
between
Jackson
and Will

iams. In
most juri
sdictions
, an "oth

er" third
party is a
ble to

recover l
osses att
ributable
to the au

ditor's gr
oss negli
gence, b
ut not or

dinary n
egligenc
e.

A secon
d argum
ent is tha
t Willia

ms' negli
gence w
as not th
e proxim

ate cause
of Apex'
s

loss. Th
e loss ap
parently
occurred

prior to t
he audit
by Willi
ams and

could no
t have be
en

prevente
d even if
Williams
had disc

overed t
he defalc
ations.
Finally, t

he attorn
ey woul
d argue

contribut
ory negli
gence on
the part

of Apex.
Normall
y losses
are alloc

ated bet
ween the
parties

when bo
th partie
s are neg
ligent.

Chapter
04 - Lega
l Liabilit

y of CPA
s
4-11

Whether
the first
argumen
t that Jac

kson has
no rights
under th
e contrac

t will pre
vail is
an intere
sting que

stion. T
here is li
ttle auth
ority on t

he precis
e situatio
n in the

problem.
Althoug
h Apex i

s not the
client an
d is not
mention

ed as a b
eneficiar
y in the
engagem

ent letter
,
it is the c
ompany

whose fi
nancial s
tatement
s were a

udited.
Whether
this fact

creates t
he duty
of care o
wed by

Williams
to Jacks
on Finan
cial is, at

present,
unclear.
(c)

No. A C
PA firm
is not pr
evented

from rec
overing
against it
s insurer.

This is
precisely
the

purpose
of this ty
pe of ins
urance; i

t serves t
o protect
the insur
ed firm f

rom its o
wn negli
gence.

CPAs m
ay be bar
red from
recoveri

ng from
their ins
urers, ho
wever, if

they are
found gu
ilty of

criminal
fraud.
4-38

SOLUTI
ON: Cra
gsmore
& Comp

any, CP
As (Esti
mated ti

me: 20
minutes)

The lega
l proble
ms for C
ragsmor

e & Com
pany inv
olve pos
sible cri

minal lia
bility, as
well as c
ivil

liability,
for fraud
. The fa
cts in the

Marlowe
Manufac
turing, I
nc. audit

bear mar
ked simi
larities t
o the

facts in t
he

Contin
ental V
ending
case. In

Contin
ental V
ending

, the cou
rt found
two part

ners and
a
manager
of a CPA

firm guil
ty of cri
minal fra
ud for fa

iling to i
nsist upo
n adequa
te disclo

sure of t
he
uncollect
ibility of

a substa
ntial rec
eivable f
rom an a

ffiliate.
Mr. Crag
smore's
conduct

has impl
ications
of a cons
piracy w

ith mana
gement a
nd owne
rs of Ma

rlowe to
conceal t
he relate
d-party

aspects o
f the
lease bet
ween M

arlowe a
nd Acme
Leasing
Compan

y. Altho
ugh the i
nadequat
e disclos

ure of th
e facts
of the le
ase is no

t the pro
ximate c
ause of l
osses to

Marlowe
's credito
rs becau
se of the

company
's
bankrupt
cy, it is c

onceivab
le that a
finding o
f fraud a

gainst Cr
agsmore
& Comp
any with

respect t
o the
lease dis
closure

would le
ad to rec
overy of
damages

against t
he CPA
by the cr
editors o

f Marlo
we.
Generall
y, there i

s no requ
irement t
hat finan
cial state

ments or
notes dis
close the

lack of fi
re
insuranc
e. Many

compani
es do not
obtain in
surance

coverage
by choic
e; others

cannot o
btain
coverage
because

of the ha
zards of
their pro
ducts or

locations
. Accor
dingly, t
he unqua

lified opi
nion
of Crags
more &

Compan
y does n
ot appea
r to be in

appropri
ate beca
use of M
arlowe's

lack of i
nsurance
coverage
.

4-39
(SOLUT
ION: Se

curities
Acts Lia
bility (E
stimated

time: 15
minutes)
(a)

(3) Secti
on 11 of
the Secu
rities Ac

t of 1933
imposes
liability
on audit

ors for m
isstatem
ents or

omission
s of a ma
terial fac
t in certif

ied finan
cial state
ments or
other inf

ormation
provided
in

registrati
on state
ments.
Similarl

y, under
Section
10(b), R
ule 10b-

5 of the
Securitie
s Exchan
ge

Act of 1
934, the
plaintiff
must pro

ve there
was a m
aterial m
isstatem

ent or o
mission i
n

informat
ion relea
sed by th
e compa

ny, such
as audite
d financi

al statem
ents.
(b)

(3) Unde
r both Se
ction 11
of the 19

33 Act a
nd Secti
on 10(b)
of the 19

34 Act, t
he plaint
iff

must alle
ge or pro
ve that s/
he incurr

ed mone
tary dam
ages.

(c)
(1) Und
er Sectio
n 11 of t

he 1933
Act, the
burden o
f proof is

shifted t
o the def
endant,

accounta
nt. The
accounta
nt may t

hen defe
nd himse
lf or hers
elf by est

ablishing
due dilig
ence.

The plai
ntiff doe
s not hav
e to sho

w lack o
f due dili
gence by
the CPA

Under S
ection 1
0, the

plaintiff
must pro
ve scient
er.

(d)
(4) The
plaintiff

does not
have to p
rove that
s/he was

in privit
y with th
e CPA u

nder eith
er
section.

(e)
(2) Und
er Sectio
n 10(b),

the plain
tiff must
prove ju
stifiable

reliance
on the fi
nancial

informat
ion. Thi
s is not t
rue unde

r Section
11 in wh
ich the p
laintiff n

eed prov
e only th
e items

in item (
a) and (b
) discuss

ed above
.
1234567890ABCDEFGHIJKLMNabcdefghijklmn!@#$%^&&*()_+.

VIP

10

240

2017 Baidu | | | |

Principle of Au

QQ

/15

0 VIP,

 | | | | |