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Auditor’s legal and professional liability

Auditor’s are always liable to third parties incase of negligence.This paper describes various cases that are related to the auditor’s liability due to negligence.

language english
wordcount 3079 (cca 8.5 pages)
contextual quality N/A
language level N/A
price free
sources 12
Table of contents

Introduction 1
Cases 2
Ultramares Corporation v. Touche (1931) 2
Facts of the case 2
Judgment 3
Arguments supporting for negligence 3
Arguments against negligence 3
Harold Tod Parrott v. coopers & Lybrand, LLP (1998) 4
Facts of the case 4
Judgment 5
Arguments supporting negligence 5
Rusch Factors, Inc. v. Levin (1986) 5
Facts of the case 6
Judgment 6
Arguments in support of negligence 7
Arguments against negligence 7
Auditing standards 7
ASA 240 the Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Reports 7
ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement 8
ASA 330 the Auditor’s Procedures in Response to Assessed Risks 8
Conclusions 9
Bibliography 10

Preview of the essay: Auditor’s legal and professional liability

Auditor’s are liable to third parties incase of negligence. They are liable in tort law and in contract law. Third parties such as investors and buyers suffer damages due to wrong audits done by auditors. Investors suffer damages in the secondary market and buyers make losses when buying shares. Liability of auditors to third parties can be described as liability for pure economic loss. Auditors are liable for negligence behavior if a misleading audit led to damages in the secondary market (Tubbs 1990, p.453). They are also liable for simple negligence in the case of primary market audit. The law of tort restricts and excludes the liability of an auditor for pure financial loss. However, contract law demands that pure economic losses must be compensated in the case of simple negligence. Damages that are caused to the shareholder, under an implied contract between the shareholder and the auditor, damages can be recovered because the auditor is liable for simple ...

... limited class of known or intended users and any third party whom the auditor may foresee as user. In order for an auditor to be liable for negligence, the plaintiff must prove that he or she suffered a loss due to auditor’s negligence. The plaintiff must have relied on the financial reports that led to incurrence of loss. In order to prevent litigation, auditors are required to emphasize on complying with GAAS and professional ethics. Auditors must maintain sufficient professional liability as well as examining potential clients carefully. They must have a complete knowledge of clients business and cautiously assess any risk mistakes and abnormalities together with the ones specified by weak areas in internal control.
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Princess R.

Very instructive and edifying. Highly recommended for legal students.

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