course material

1. Distinguish between audit risk and audit failure. Why is there
REVIEW QUESTIONS5-1 (OBJECTIVE 5-1) Lawsuits against CPA firms continue to increase.
State your opinion ofthe 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 leastsome 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 ofcourt. What are the
implications to the profession?5-5 (OBJECTIVES 5-3, 5-4) What is meant by contributory
negligence? Under what conditionswill 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
toclients under common law.5-8 (OBJECTIVE 5-5) Is the auditor’s liability under common
law affected if the third partywas unknown rather than known? Explain.5-9 (OBJECTIVE 5-
6) Contrast the auditor’s liability under the Securities Act of 1933 with thatunder 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 theclient, 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 auditorcan 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 forauditors?5-13 (OBJECTIVE 5-
8) In what ways can the profession positively respond to and reduce li-ability in auditing?