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Definition
| Lack of even slight care, tantamount to reckless behavior, that can be expected of a person |
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Term
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Definition
| Absence of reasonable care that can be expected of a person in a set of circumstances |
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Term
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Definition
| Existence of extreme or unusual negligence even though there was no intent to deceive or do harm - "recklessness" |
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Term
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Definition
| In the case of an audit is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intention of deceiving statement users |
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Term
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Definition
| Occurs when a misstatement is made and there is both the knowledge of its falsity and the intent to deceive |
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Definition
| Failure of one or both parties in a contract to fulfill the requirements of the contract |
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Definition
| A third party who does not have privity of contract but is known to the contracting parties and is intended to have certain rights and benefits under the contract - e.g. a Bank |
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Term
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Definition
| Client sues auditor for not discovering a material fraud during the audit |
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Term
| Liability to third parties under common law |
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Definition
| Bank sues auditor for not discovering that a borrower's financial statements are materially misstated |
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Term
| Civil Liability under federal securities laws |
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Definition
| Combined group of stockholder sues auditor for not discovering materially misstated financial statements |
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Term
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Definition
| Federal government prosecutes auditor for knowingly issuing an incorrect audit report |
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Term
| Cenco Inc. vs. Seidman & Seidman |
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Definition
Example of Liability to Clients
Ruling: CPA not responsible for managements wrongdoing and not deemed negligent |
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Term
| Tenants vs. Max Rothenberg and Co. |
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Definition
Liability of clients
There was embezzled funds and missing invoices that CPA failed to follow up on even though not necessarily performing auditing services
Followup: Engagement letters |
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Term
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Definition
| means that the CPA firm claims that there was no implied or expressed contract |
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Term
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Definition
| the CPA firms claims that the audit was performed in accordance with auditing standards. Even if there were undiscovered misstatements, the auditor is not responsible if the audit was conducted properly |
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Term
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Definition
| Exists when the auditor claims the client's own actions either resulted in the loss that is the basis for damages or interfered with the conduct of the audit is such a way that prevented the auditor from discovering the cause of the loss |
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Term
| Absence of Causal connection |
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Definition
| The client must be able to show that there is a close causal connection between the auditor's failure to follow auditing standards and the damages suffered by the client. Auditor defense is damages were caused by other means. |
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Term
| Ultimares doctrine (Ultimares vs. Touche) |
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Definition
| Ordinary negligence is insufficient for liability to third parties because of the lack of privity of contract between the third party and the auditor, unless the third party is a primary beneficiary |
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Term
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Definition
| members of a limited class of users that the auditor knows will rely on the financial statements |
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Term
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Definition
| An unlimited class of users that the auditor should have reasonably been able to foresee as being likely users of the financial statements |
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Term
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Definition
| third parties who are original purchasers of securities may recover damages from the auditor if the financial statements are misstated, unless the auditor proves that the audit was adequate or that the third party's loss was caused by factors other than misleading financial statements |
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Term
| Securities Exchange Act of 1934 |
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Definition
| Deals with companies that trade securities on national and over-the-counter exchanges; auditors are involved because the annual reporting requirement include audited financial statements |
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Term
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Definition
knowledge and intent to deceive, is required before CPAs can be held liable for violation of Rule 10b-5
Hochfelder vs. Ernst & Ernst |
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Term
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Definition
| antifraud provisions of the 1934 act, as they prohibit any fraudulent activities involving the purchase or sale of any security. Applies not only to direct sellers but also to accountants, underwriters, and others. |
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Term
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Definition
| the legal concept that a person has a duty to exercise reasonable care and diligence in the performance of obligations to another |
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Term
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Definition
| the professional's obligation under the law to provide a reasonable level of care while performing work for those served |
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