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Chapter 5
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Learning Objective 1
Understand the litigious environment in which CPAs practice.
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Learning Objective 2
Explain why the failure of financial statement users to differentiate among business failure, audit failure, and audit risk has resulted in lawsuits.
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Learning Objective 3
Use the primary legal concepts and terms concerning accountants liability as a basis for studying legal liability of auditors.
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Learning Objective 4
Describe accountants liability to clients and related defenses.
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Liability to Clients
The most common source of lawsuits against CPAs is from clients.
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Learning Objective 5
Describe accountants liability to third parties under common law and related defenses.
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Foreseen Users
Credit alliance Restatement of torts Foreseeable user
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Learning Objective 6
Describe accountants civil liability under the federal securities laws and related defenses.
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SEC Sanctions
The SEC has the power in certain circumstances to sanction or suspend practitioners from doing audits for SEC companies. In recent years, the SEC has temporarily suspended a number of individual CPAs from doing any audits on SEC clients.
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Learning Objective 7
Specify what constitutes criminal liability for accountants.
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Criminal Liability
CPAs can be held liable under criminal liability for accountants. CPAs can be found guilty for criminal action under both federal and state laws.
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SarbanesSarbanes-Oxley Act
This act makes it a felony to destroy or create documents to impede or obstruct a federal investigation.
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Learning Objective 8
Describe what the profession and the individual CPA can do and what is being done to reduce the threat of litigation.
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End of Chapter 5
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