The primary legal issue was the claim of negligent misinterpretation and the secondary issue was the third party breach of contract. The Bank claimed that it suffered losses as a third-party beneficiary of the engagement contract to conduct the audit between Brandon and GKCO. The Bank also claimed that GKCO committed the tort of negligent misrepresentation. According to the definition, when the parties enter into a contact, they can agree that the performance of one of the parties should be rendered to or directly benefit a third party, which then becomes an intended third-party beneficiary (Cheeseman, 2012, p. 266). An intended third-party beneficiary has the right to enforce the contract against the breaching party. As described in Section 552 of the Restatement (Second) of Torts, an accountant is liable for his or her negligence to any member of a limited class of intended users for whose benefit the accountant has been employed to prepare the client’s financial statements or to whom the accountant knows the client will supply copies of the financial statements (Cheeseman, 2012, p. 896). An accountant can be found liable to a third-party beneficiary if the following conditions are met: (1) the client intended the accountant’s work to benefit or influence the third party; and (2) the accountant knew of that intent (Johnson Bank v. Korbakes, 2005). Both the U.S.…
4. The accountants could avoid liability if they could show they were neither negligent nor fraudulent. – True, they are not liable as they were not appointed post issue.…
If an auditor fails to fulfill a certain requirement in the contract, they may be guilty of:…
When auditing a publicly held company, auditors need to observe principles. The ethical principles of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct are independence, responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services. More specifically, audit team members are required to be objective and independent with regard to the audit by maintaining objectivity and being free of conflicts of interest in discharging professional responsibilities and by being independent in fact and appearance when providing auditing and other attestation services. Through this one can see how influential the SEC is. Under the Sarbanes-Oxley Act of 2002, auditors have to be objective and independent otherwise legal sanctions can be incurred.…
Until the case of Ultramares Corp. v. Touche, auditors admitted no liability whatsoever to third parties. The judgment in Ultramares reaffirmed the principle that a fraudulent accountant, not a negligent one, would be liable to third parties misled by his or her statements. This case has had an impact on the work of auditors in terms of the care they exercise in preparing the auditor's report. Coercive forces compelled auditors to adopt behaviors to do what it takes to protect them from third-party liability by producing high-quality work.…
AU section 316 concentrates on the possibility of discovering fraud when auditing financial statements. The standard found in this Section details the responsibilities that auditors must fulfill in an audit pertaining to fraud. AU section 316 helps auditors understand the processes that need to be fulfilled as well as their responsibilities when performing an audit. In order to obtain reasonable assurance that the audit was conducted in compliance with AU Section 316, auditors must meet their obligation to ensure that the financial statements are free from material misstatements. Material misstatements could be caused by any errors or fraud but the auditors must gain enough evidence to give an opinion when performing an audit.…
Provide a specific example how the act increased ethical requirements of the auditor and increased auditor liability.…
As the chief legislative counsel for an accounting industry, we believe that the privity approach is the best way to regulate the accounting profession in terms of liability in the state of Texas. It is necessary that a contractual relationship or in the least a direct connection be evident between an auditor and a non-client in order for that auditing firm to be liable for any damages done unto the third party. In the Ultramares v. Touche case, the judges found that a liability arose out of a duty that Touche, the accounting firm, owed to the non-client, Ultramares. Touche certified that their client, for whom they were performing the audit, was solvent when in fact it was not. In the case, it is pointed out that Touche knew their client was borrowing at large sums and required “certified balance sheets for continuing existing loans and securing new loans” (Ultramares). However, the auditors did not explicitly know all of the parties who would be relying on these statements. It would be prudent for non-clients relying on a company’s financial statements to contact the auditing firm so that the auditors know the non-client will be relying on them. This would help the auditors not only make a more adequate measurement of risk, but also allow them to give a more qualified opinion by allowing them to focus on those areas the non-clients will be relying on. In Landell v. Lybrand, it was found that accountants falsely reported financial information for their client and, consequently, were being sued by a party who had purchased stock in that company. The court decided, however, that since the auditors had no knowledge of the stock purchaser, a duty was not owed (Landell). Many frivolous lawsuits would arise if accountants were liable to anyone who relied on a client’s financial statements. This would clog the system with unnecessary costs and time demanding proceedings. Judge Finch’s dissent on the Ultramares case states, “If the accountant is to be held to an…
In section 11 of the securities act of 1933 the auditors have the burden of proof and in the securities exchange act of 1934 section 18 the plaintiffs have the burden of proof and auditors cannot be held liable for ordinary negligence. They must prove they suffered an economic loss, the financial statements contained a material misstatement, the loss was caused by reliance on the materially misstated statements, and auditors were aware that the financial statements contained a material misstatement. This difference exist because people would buy shares after they know that a company is going bankrupt and in making the burden of proof on the plaintiff it would take that away. In the SEC act of 1933 the plaintiffs only have to prove that they suffered an economic loss and the statements there were material misstatement. By having to show reliance on the statements it takes away a defense that the auditors had which is the causation defense. The defense for auditors in security exchange act of 1933 is due diligence or causation defense. In SEC act of 1934 it is good faith which is no knowledge of the material misstatement. Under common law auditors are liable to reasonably foreseeable third parties.…
Should an investor be able to sue a corporation's auditor if audited financial statements materially misrepresent the financial status of the company audited?…
Contained within the Criminal Code of Canada, is the ever controversial Section 43, which provides persons in positions of authority with the right to use justifiable and reasonable force by way of correction towards a child or pupil. The section reads that:…
Computer security is not an issue for organizations alone. Anyone whose personal computer is connected to a network or the Internet faces a potential risk of attack. Identify all the potential security threats on a personal computer. Identify some of the techniques an attacker might employ to access information on the system.…
You are a senior care worker and have been asked to mentor a colleague who is finding it difficult to understand the importance of obtaining consent from individuals receiving a service.…
University of New South Wales School of Accounting Auditing and Assurance Services 2013 LECTURE 1 Introduction to the Audit Function Assurance Framework Australian Corporate Audits Auditing Standards Lecture Overview • Announcements • Overview course requirements • Introduction to the course – Assurance – Auditing – Legal requirements – Auditing standards Announcements • 1. Tutorial Allocation – Once classes are full no more will be admitted – No new classes will be scheduled – Staff-assisted changes • Will be allowed for exceptional circumstances only; and only where the class is not already at maximum size • 2.…
• To demonstrate that massive fraud typically involves collusion of a number of individuals in the management team. Further, those involved in the fraud will go to extreme lengths to fool the auditors only to later attempt to use their independent auditors as scapegoats when material errors or irregularities are discovered.…