Legal Auditor Liability

CHAPTER 20

LEGAL LIABILITY

Answers to Review Questions

1. The four general stages in the initiation and disposition of audit-related disputes are : (1) the occurrence of events that result in losses for users of the financial statements, (2) the investigation by plaintiff attorneys before filing suit to link the user losses with allegations of material omissions or misstatements of financial statements, (3) the legal process which commences with the filing of the suit, and (4) the final resolution of the dispute. The first stage, the loss-generating events, includes the events that resulted in the losses; for example, client bankruptcy, financial distress, fraudulent financial reporting, and misappropriation of assets. The second stage, pre-suit investigation, may involve investigation activities by plaintiffs and their attorneys before initiating legal proceedings. The legal process makes up the third stage. The stage involves activities such as filing of complaints, discovery, trial preparation, and the trial. The last stage involves the resolution of the dispute, which may include a summary judgment, a settlement to avoid or discontinue litigation, or a court decision on appeal after a trial

20-2 Proportionate liability is where each defendant is liable solely for the portion of the damages that correspond to the percentage of responsibility of that defendant. Under the doctrine of joint and several liability, each defendant is held fully liable for all assessed damages, regardless of the extent to which they contributed to the injury.

20-3 Under common law, an auditor can be held liable to clients for beach of contract, negligence, gross negligence/constructive fraud, and fraud. A client would prefer to sue an auditor for a tort action because larger amounts for damages can be assessed than for a breach of contract.

20-4 The elements required for establishing an auditor's liability for negligence to clients are (1) the duty to...