Explain the four sources of auditor liability.

Expert Solution

The four sources of auditor liability are ;

1. Liability to client

2. Third Party Liability

3. Liability to government

4. Criminal Liability

Let us go through the liabilities is some details.

1. Liability to client : As the auditor has legal engagement with the client , it may face liability for breach of engagement. The client may initiate legal action for any negligence or misstatement against the auditor.

2. Third Party liability : The users of audited financial statements like creditors, shareholders and investors may sue auditor for failure to use due care , for material misstatement , or misrepresentation of facts which may have negatively impacted the decision making of the user.

3. Liability to Govt : Got may sue the auditor for knowingly issuing incorrect audit report . The auditors liability has increased with SEC reports and Form 10 K reports .SEC can put sanctions on auditors for negligence and wrong reporting.

4. Criminal Liability : Auditors cab be liable for criminal liability for accountants . Auditors can become liable to criminal offenses under various federal and state laws. Under Sarbanes Oxley Act , destroying or creating documents to obstruct or impede federal investigation is treated as felony.

ekkarill92 answered 4 months ago

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