After studying this chapter you will be able to: Understand the basic principles of sampling, including the differences between statistical and nonstatistical sampling and sampling and nonsampling risk; understand the basic steps and procedures used in implementing a sampling plan; identify the two situations in which sampling is used in an audit. | Auditing & Assurance Services, 6e Module C Legal Liability “When men are pure, laws are useless; when men are corrupt, laws are broken.” Benjamin Disreali, Former British Prime Minister Mod C-2 Sources of Auditor Liability Common law: Uses legal precedent to identify responsibility. Clients Nonshareholder third parties Statutory liability: Based on violations of written statutes. Shareholders Mod C-3 Common Law Breach of contract: Services not performed by auditors in manner described in contract Tort liability: Obligation based on failure of auditors to exercise appropriate level of professional care Ordinary negligence is lack of reasonable care Gross negligence is lack of minimal care (similar to constructive fraud) Fraud is a misrepresentation of fact an individual knows to be false Mod C-4 Common Law Liability: Clients Sources of Liability Breach of contract Tort liability (ON, GN, F) Clients must show Economic loss Auditors breached contract or failed to exercise appropriate care The loss was caused by the breach of contract or failure of auditors to exercise the appropriate level of care Defenses Auditors did not breach contract or performed with appropriate level of care Causation (something else caused client loss) Contributory negligence (clients were partially responsible for loss) Mod C-5 Types of Third Parties Primary beneficiaries: Known by name to the auditor Foreseen: Parties who could reasonably be expected to rely on the auditors’ work Foreseeable: Parties whose decisions normally rely on audited F/S and opinions on those F/S More Known to Auditor Less Known to Auditor Mod C-6 Common Law Liability: Third Parties Generally liable to all third parties for gross negligence and fraud Liability for ordinary negligence Ultramares: No liability for ordinary negligence Credit Alliance v. Arthur Andersen: Liable to primary beneficiaries for ordinary negligence Fleet National Bank (restatement of torts): Liable to foreseen third parties for ordinary . | Auditing & Assurance Services, 6e Module C Legal Liability “When men are pure, laws are useless; when men are corrupt, laws are broken.” Benjamin Disreali, Former British Prime Minister Mod C-2 Sources of Auditor Liability Common law: Uses legal precedent to identify responsibility. Clients Nonshareholder third parties Statutory liability: Based on violations of written statutes. Shareholders Mod C-3 Common Law Breach of contract: Services not performed by auditors in manner described in contract Tort liability: Obligation based on failure of auditors to exercise appropriate level of professional care Ordinary negligence is lack of reasonable care Gross negligence is lack of minimal care (similar to constructive fraud) Fraud is a misrepresentation of fact an individual knows to be false Mod C-4 Common Law Liability: Clients Sources of Liability Breach of contract Tort liability (ON, GN, F) Clients must show Economic loss Auditors breached contract or failed to exercise appropriate .
