Learning Objectives LO1 List some examples of potential civil and criminal litigation facing PAs. LO2 Apply and integrate the chapter topics to analyze.

Learning ObjectivesLO1 List some examples of potential civil and criminal litigation facing PAs.

LO2 Apply and integrate the chapter topics to analyze a practical auditing situation/case/scenario.

LO3 Recognize U.S. SEC, SOX, and other (statutory) law liability issues. (Appendix 20A)

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Legal Liability Implications for Auditor PracticeAs a result of the increasingly litigious climate, auditors ought to( a ) be wary of what kind of clients are accepted( b ) know (thoroughly) the client’s business (KNOB)( c ) perform quality audits:

(i) use qualified personnel, properly trained and supervised, and motivated(ii) obtain sufficient evidence (including proper elicitation of oral evidence and documentationof client’s oral evidence)(iii) prepare good working papers(iv) obtain engagement and representation letters

LO2

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Legal Liability Implications for Auditor PracticeIncreased litigation has also caused improvements in audit working paper files through use of( a ) forceful management letters that are “unambiguous and couched in terms of alarm with respect to problematic internal controls or sloppy bookkeeping”( b ) detailed memos in the working papers describing the conversation with the client and accompanied by a follow-up letter to the client( c ) a letter to the client or note to the file documenting discussions to reduce audit fees or changing to a review engagement

LO2

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Legal Liability Implications for Auditor PracticeThere are sometimes serious problems in many auditor-client relationships.

auditors should report to a company’s audit committee standard setters should reduce the number of

accounting alternatives in GAAP, auditors need more guidance on how to report on a

company’s ability to continue, and auditors need to better document high-risk clients and

be ready to take immediate defensive measures.Before accepting clients, PAs should ask why clients are changing accountants, visit the client’s business, meet their accounting and tax personnel, and check their references.

LO2

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