1. CHAPTER 4 -LEGAL LIABILITY

2. CHANGED LEGAL ENVIRONMENT EXPANDING LIABILITY –AWARENESS OF CPAS AS DEFENDENTS –GREATER COMPLEXITY OF ACCOUNTING AND AUDITING –DEEP POCKETS –CONTINGENT FEES –WILLINGNESS TO SETTLE –TRIAL BY PEERS

3. FAILURES BUSINESS FAILURES –BAD JUDGMENTS, POOR BUSINESS AUDIT FAILURES –BAD AUDITING AUDIT RISK –RISK OF REACHING WRONG CONCLUSION ABOUT F/S

4. LEGAL CONCEPTS PRUDENT PERSON CONCEPT –DUTY TO EXERCISE SKILL AS IS COMMON TO MEMBERS OF PROFESSION –DUTY FOR GOOD FAITH, NOT INFALLIBILITY LACK OF PRIVILEDGED COMMUNICATION

5. NEGLIGENCE AND FRAUD –ORDINARY FRAUD FAILURE TO EXERCISE REASONABLE CARE –GROSS NEGLIGENCE FAILURE TO EXERCISE EVEN SLIGHT CARE –CONSTRUCTIVE FRAUD RECKLESSNESS WITHOUT INTENTION –FRAUD MISSTATEMENT IS MADE WITH INTENT CONTRACT LAW –BREACH ON CONTRACT –THIRD-PARTY BENEFICIARY

6. COMMON LAW –LAW DEVELOPED THROUGH COURT DECISIONS (PRECIDENT CASES) –VARIES FROM STATE TO STATE STATUTORY LAW –LAWS PASSED BY GOVERNMENTAL UNITS –FEDERAL STATUTES 1933 AND 1934 SECURITIES ACTS ICC, FTC –STATE STATUTES APPORTIONMENT OF LIABILITY –JOINT AND SEVERAL –SEPARATE AND PROPORTIONATE LIABILITY

7. LIABILITY TO CLIENTS BREACH OF CONTRACT TORT ACTION BASED ON NEGLIGENCE –LEVEL OF CARE REQUIRED –FAILURE TO MEET GAAS DEFENSES –LACK OF DUTY –NONNEGLIGENT PERFORMANCE –CONTRIBUTORY NEGLIGENCE –LOSS NOT CAUSED BY NEGLIGENCE

8. LIABILITY TO THIRD PARTIES PRIVITY OF CONTRACT –ULTRAMARES V TOUCHE (1931) NY –NAMED IN CONTRACT FORESEEN USERS –RESTATEMENT OF TORTS –RUSCH FACTORS (1968) FORESEEABLE USERS –ROSENBLUM V ADLER (1984) NJ (REVERSED)

9. LIABILITY UNDER FEDERAL SECURITIES LAWS SECURITIES ACT OF 1933 –INITIAL PUBLIC OFFERINGS ANY INITIAL PURCHASER 3RD PARTY RELIANCE NOT NECESSARY AUDITOR MUST SHOW NONNEGLIGENCE SECURITIES ACT OF 1934 –SECONDARY MARKETS –GROSS NEGLIGENCE OR FRAUD –SCIENTER (KNOWLEDGE) RICO

10. CRIMINAL LIABILITY KNOWINGLY BEING INVOLVED IN DECEPTION –US V SIMON (CONTINENTAL VENDING) –US V WEINER (EQUITY FUNDING) –ESM GOVT V A. GRANT

11. PROFESSION’S RESPONSE TO LIABILITY STANDARD SETTING TO MEET NEEDS REQUIREMENTS TO PROTECT AUDITORS PEER REVIEW REQUIREMENTS OPPOSE LAWSUITS EDUCATION OF USERS SANCTION MEMBERS LOBBY FOR CHANGES

12. INDIVIDUAL RESPONSE TO LIABILITY HONEST CLIENTS HIRE QUALIFIED PERSONNEL AND ADEQUATE TRAINING FOLLOW STANDARDS MAINTAIN INDEPENDENCE UNDERSTAND BUSINESS DOCUMENT WORK THROUGHLY ENGAGEMENT LETTERS