Acct 402 Cont.

• unintentional mistake in computations or application of principles
• unintentional incorrect estimates

intentional misrepresentation of transactions, records, accounting principles

Design the audit to provide reasonable assurance of detecting E/I that are material to the financial statements

Failure to detect is not automatically evidence of auditor negligence ( e.g, irregularities such as forgery and collusion are difficult to detect)

• 1. poor internal controls.
• 2. management decisions dominated by single person
• 3. aggressive management
• 4. poor profitability of client
• 5. rapid growth
• 6. going concern problems
• 7. related party transactions - fictitious company
• 8. new client (easier to fool a new auditor)

Refer to a level of management at least one level above where fraud occurred

consider effect on f/s - revise f/s accordingly - if client refuses, qualified, adverse, or withdraw

communicated findings to audit committee

if client is public, may need to tell SEC if client does not.

• Illegal acts is violations of laws or government regulations (some relevant laws: RICO, FCPA)
• Whether an act is illegal is normally beyond the expertise of an auditor

Design the audit to provide reasonable assurance of detecting illegal acts that have a direct, material effect on the f/s's (active responsibility to look for these) e.g tax laws

inactive

• 1. breach of contract: engagement letter is a contract
• 2. tort law- negligence

• 1. damages
• 2. CPA was negligent (at least ordinary)

• Ordinary negligence- lack of reasonable care (failure to follow GAAS)
• Gross negligence- lack of even slight care
• Fraud- intentional deception.

• 1. due care (not negligent, followed GAAS), also called due diligence
• 2. contributory or comparative negligence (share the blame with client)
• 3. clear engagement letter

• 1. 3rd party beneficiary (3B)= 3rd party that benefits from a contract between other persons
• 2. Primary Beneficiary (known users)= specifically named or known at time of contracting to do audit
• 3. Foreseen User= known, but not specifically (only as a group)
• 4. Foreseeable user= reasonably foreseeable that would rely on audit

• 1. damage
• 2. reliance (and proximate cause)
• 3. cpa negligence- type of negligence required depends on what kind of 3B (and state)
• with PRIVITY of contract: at least ordinary negligence
• without PRIVITY: at least gross negligence (fraud)

• Primary- Ultramares vs. Tourche
• Foreseen- Rusch factors vs. Levin
• Foreseeable- Rosenblum vs. Adler

• 1. due caare
• 2. lack of privity

• Applies to any person acquiring securities through a "public offering" (IPO vs. Seasoned PO)
• FIRST BUYER

• 1. F/s were "false or misleading" as to "material fact"
• 2. damages ( drop in stock price)

Person doesn't need to show reliance on f/s or that drop in prices was fault of misleading statements

• 1. f/s not "false or misleading" or discrepancy was"immaterial"
• 2. Due Care (followed GAAS)
• 3. Another cause of damage ( general market drop)

CPA has to show he/she was not negligent- therefore CPA is essentially liable for any negligence. Therefore with ordinary negligence, CPA loses.

Applies to all "publicly traded" companies to file annual f/s (10K) and quarterly f/s (10Q) with the SEC -10k has to be audited, 10Q has to be reviewed. "Continuous Disclosure Act"

• section 18 = gross recklessness
• section 10 = scienter - rule 10-5b

• -be a buyer or seller of stock
• -show f/s false or misleading as to material fact
• -prove of damages
• -prove reliance on f/s
• -gross recklessness (18) or scienter (10)

• -due care
• -f/s not false or misleading / immateriality
• -other causes of drop in stock prices.