REVIEW QUESTIONS
5-1 (OBJECTIVE 5-1) Lawsuits against CPA firms continue to increase. State your opinion of
the positive and negative effects of the increased litigation on CPAs and on society.
5-2 (OBJECTIVE 5-2) Distinguish between audit risk and audit failure. Why is there at least
some level of audit risk on every audit engagement?
5-3 (OBJECTIVE 5-3) How does the prudent person concept affect the liability of the auditor?
5-4 (OBJECTIVES 5-1, 5-8) Discuss why many CPA firms have willingly settled lawsuits out of
court. What are the implications to the profession?
5-5 (OBJECTIVES 5-3, 5-4) What is meant by contributory negligence? Under what conditions
will this likely be a successful defense?
5-6 (OBJECTIVE 5-4) A common type of lawsuit against CPAs is for the failure to detect a fraud.
State the auditor’s responsibility for such discovery. Give authoritative support for your answer.
5-7 (OBJECTIVE 5-4) Explain how an engagement letter might affect an auditor’s liability to
clients under common law.
5-8 (OBJECTIVE 5-5) Is the auditor’s liability under common law affected if the third party
was unknown rather than known? Explain.
5-9 (OBJECTIVE 5-6) Contrast the auditor’s liability under the Securities Act of 1933 with that
under the Securities Exchange Act of 1934.
5-10 (OBJECTIVES 5-4, 5-5, 5-6, 5-7) Distinguish among the auditor’s potential liability to the
client, liability to third parties under common law, civil liability under the securities laws,
and criminal liability. Describe one situation for each type of liability in which the auditor
can be held legally responsible.
5-11 (OBJECTIVE 5-6) What potential sanctions does the SEC have against a CPA firm?
5-12 (OBJECTIVE 5-7) How did the Sarbanes–Oxley Act of 2002 increase criminal liability for
auditors?
5-13 (OBJECTIVE 5-8) In what ways can the profession positively respond to and reduce li-
ability in auditing?
