Auditors take complete responsibility for detecting all fraud in a set of financial statements they are auditing.
True
False
False
Constructive fraud is characterized as an intentional act designed to deceive, mislead or injure the rights of another person.
True
False
False
Due professional care is when an auditor observes all the rules of conduct for the profession and applies all the standards of the profession.
True
False
True
The decision in Hedley Byrne, established the fact that professionals do not have a duty of care to others whom they know will rely on their professional advice so long as they disclaim all responsibility to the parties involved.
True
False
False
In the case, Flanders v. Mitha, it was found that the investors did not actually rely on the financial statements when making their investment decision.
True
False
True
What does tort refer to?
Tort refers to a private or civil wrong or injury whereby a victim is compensated for harm suffered by others. To prove these cases there must be proof that the victim was harmed and that the harm was caused by the other person.
Negligence is the failure to perform a duty with the requisite standard care. What are the four elements of negligence and what would be an auditor's defense against them?
There existed a legal duty of care to the plaintiff which was breached by the auditor and there is proof that damage resulted from the breach in duty. There must also be a reasonably proximate connection between the breach of duty and the resulting damage. The auditor's best defense is that one of the four elements noted above was missing ex. That the duty of care was not breached by the auditor (followed GAAP and GAAS) and/or that there was contributory negligence by the plaintiff.
What important results for auditor's came from the Ultramares Corporation v. Touche (1931) case?
This case outlined criteria for an auditor's liability to third parties for deceit i.e. how to prove deceit. This case also resulted in auditors not being liable to third parties under common law and helped US Congress pass the SEC Acts of 1933 and 1934.
Who would be considered a reasonably foreseeable third party for an auditor?
A reasonably foreseeable third party would include current shareholders and lenders as well as limited classes of prospective shareholders and lenders. Auditors owe a duty to third parties of which they have a actual knowledge of the limited class that will use and rely on the audited financial statements. I.e. known third parties, reasonably foreseeable third parties, all third parties relying on financial statements.
When can an auditor be held fraudulently negligent even if the financial statements they audited are in conformity with GAAP?
If the financial statements are found to be materially misleading to the user and the auditor is associated with them then the auditor could be charged and found guilty of fraud.
breach of contract:
a claim that accounting or auditing services were not performed in the manner agreed.
common law:
all the cases and precedents that govern judges' decisions in lawsuits for monetary damages. Common law is "common knowledge" in the sense that judges tend to follow the collective wisdom of past cases decided by themselves and other judges.
Financial Reporting Releases (FRR):
SEC publications of rules and policies about accounting and disclosures.
foreseeable beneficiaries:
creditors, investors or potential investors who rely on accountant's work.
gross negligence:
lack of even minimum care in performing professional duties, indicating reckless disregard for duty and responsibility.
injunction:
legal settlement in which a person or company, without admitting or denying a violation of law, agrees not to violate the law in the future.
litigated:
settlement of a controversy by a judge in the civil justice system.
nonpublic company:
company with less than $5 million in assets and fewer than 500 shareholders. Not required to register and file reports under the Exchange Act.
nonpublic offering:
sale of securities to a small number of persons or institutional investors (usually not more than 35), who can demand and obtain sufficient information without the formality of registration. (see also private placement)
ordinary negligence:
lack of reasonable care in the performance of professional accounting tasks.
primary beneficiaries:
third parties for whose primary benefit an audit or other accounting service is performed.
private placement:
sale of securities to a small number of persons or institutional investors (usually not more than 35), who can demand and obtain sufficient information without the formality of registration. (see also nonpublic offering)
privity:
the relationship of direct involvement between parties to a contract.
prospectus:
set of financial statements and disclosures distributed to all purchasers in an offering registered under Securities Law.
racketeering acts:
engagement in illegal activities such as fraud in the sales of securities, mail fraud, wire fraud.
scienter:
person's action with knowing intent to deceive.
statutory law:
all the prohibitions enacted by a legislature.
tort:
legal action covering civil complaints other than breach of contract; normally initiated by users of financial statements.
