2. What are the three types of law that are relevant to auditors’ legal liability? Explain...
2. What are the three types of law that are relevant to auditors’ legal liability? Explain the causes of legal action under each type.
Homework Answers
The two most important laws relating to auditors’ liability are the Securities Act of 1933 and the Securities Exchange Act of 1934. CPAs must also be concerned with the application of the Racketeer Influenced and Corrupt Organizations Act (RICO) and with each state’s blue sky laws (which regulate the issuance and trading of securities within a certain state)
The possible entities that may sue an auditor and the possible reason for a lawsuit are :
1. Client : The auditor may have a legal liability for the breach of contract. Auditors obtain an engagement letter and any breach of stated terms can be a valid reason for legal action.
2. Users (Third Party) : The audit may have a legal liability in the case of Negligence. The auditor has failed to use due care and has failed to identify material misstatement.
3. Government : The auditor in the case of fraud will have a legal liability. The auditor has knowingly issues an incorrect audit report.
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2. What are the three types of law that are relevant to
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