Question

 

1. Compare and explain the business failure, audit failure and audit risk.

2. List and explain the 4 major sources of auditor's legal liability.

3. Explain what constitutes criminal liability for accountants.

Answer 1

1.Business failure

It occurs when the business is unable to repay its lender or meet the expectations of its investors because of the economic or business conditions, such as recession, poor management decisions.

Audit failure

It occurs when an auditor issues an incorrect audit opinion because it failed to comply wiht the requirements of auditing standards.

Audit risk

It refers to the risk that auditor may issue unqualified audit report due to the failure of the auditor to detect material misstatement due to error or fraud

2.Four major sources of uditor's legal liability are:

a) Liability to client: Eg Client sues auditor for not detecting a material fraud during the audit

b)Criminal Liability:Eg Prosecution against the auditor for issuing an incorrect audit report

c)Civil Liability: Eg Group of shareholders rosecute against the auditor for not discovering material misstatement in finanacial statements

d)Liability to third party under common law:Eg Bank sues the auditor

3.An accountant is liable for the client's accounting misstatements.This risk of being responsible for fraud or material misstatements forces the accountant to adhere to all applicable accounting standards.An accountant who is negligible in hie examination of a ompany can face legal charges from either the company or the investors and creditors that rely on it's work.