Question

Four Major Sources of Auditors’ Legal Liability

Please Explain :

1. Liability to clients

2. Liability to third parties

3.Federal securities laws

4. Criminal liability

Answer 1

Auditors are liable potentially for their civil and criminal offences.There are mainly four major sources of auditor's legal liability which are as follows:

1. Liability to clients - In this case auditor has entered in contract with client to provide them services. If the auditor fails to provide required services, he may be sued by client for damages due to breach of contract. For instance a client may sue auditor for not attempting to find material fraud during the process of audit.

2. Liability to third parties - Auditor's can be sued by non-clients in case of fraud. For instance, bank can sue an auditor if it finds that their financial statements are misstated.

3. Federal securties laws - In this case an auditor may be sued combinedly by a group of shareholders for not trying to find out material misstatements in financial statements.

4. Criminal Liability - In such a case, Federal government can sue an auditor for knowingly issuing an audit report which is incorrect in nature. An auditor may be prosecuted for such an action.