172078
Description
Mind Map by littlepaz_2001, updated more than 1 year ago
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Created by littlepaz_2001
over 10 years ago
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Professional Liability
- Legal Liability
- Under certain legislation, notably INSOLVENCY legislation, auditors may be
found to be officers of the company.
- Could be charged with CRIMINAL offences, or found liable in
connection with the winding up of the company.
- Financial market abuse offences - INSIDER DEALING.
- Found guilty of criminal offences if they knew or suspected a person was LAUNDERING
MONEY and they failed to report their suspicions to the proper authority.
- Found guilty of criminal offences if they knew or suspected a person was LAUNDERING
MONEY and they failed to report their suspicions to the proper authority.
- Financial market abuse offences - INSIDER DEALING.
- Could be charged with CRIMINAL offences, or found liable in
connection with the winding up of the company.
- Under certain legislation, notably INSOLVENCY legislation, auditors may be
found to be officers of the company.
- Negligence
- Seeks to provide compensation to a person who has suffered loss due to another person's
wrongful neglect.
- An injured party must PROVE three things
- Duty of care existed
- Duty of care was breached
- Breach caused the injured party loss.
- Duty of care existed
- Who might bring an action for negligence?
- 1) The company
- 2) Shareholders
- 3) The Bank
- 4) Other lenders
- 5) Other interested third parties
- Extent of the PROXIMITY between the auditor and the potential claimant
- Extent of the PROXIMITY between the auditor and the potential claimant
- 5) Other interested third parties
- 4) Other lenders
- 3) The Bank
- 2) Shareholders
- 1) The company
- The audit client
- The company is all of the shareholders acting as a body
- The company has a CONTRACT with the auditor, which contains a
duty of reasonable care implied by statute.
- Auditors duty of care
- Have a responsibility to keep themselves abreast of
professional developments.
- Auditors are exercising judgement they must act both
honestly and carefully
- HOWEVER if the opinion reached by the auditors is
one that no reasonably competent auditor would have
been likely to reach, could still possibly be held
negligent.
- HOWEVER if the opinion reached by the auditors is
one that no reasonably competent auditor would have
been likely to reach, could still possibly be held
negligent.
- Auditors are exercising judgement they must act both
honestly and carefully
- Have a responsibility to keep themselves abreast of
professional developments.
- Third Parties
- Individual shareholders, potential investors, the bank
- They have no contract with the audit firm, therefore no implied duty of care
- Courts have been AVERSE to attributing a duty of care to third
parties, CASE STUDY CAPARO INDUSTRIES
- Caparo narrowed the auditor's potential liability to third parties,
as their relationship to the auditor is INSUFFICIENTLY
PROXIMATE.
- It would be unjust if auditors, who have SECONDARY RESPONSIBILITY for financial statements being
prepared negligently, bore the full responsibility for losses arising from such negligence
- Companies Act 2006 now makes it possible for auditors to limit
their liability by agreement with a company.
- It would be unjust if auditors, who have SECONDARY RESPONSIBILITY for financial statements being
prepared negligently, bore the full responsibility for losses arising from such negligence
- Caparo narrowed the auditor's potential liability to third parties,
as their relationship to the auditor is INSUFFICIENTLY
PROXIMATE.
- Courts have been AVERSE to attributing a duty of care to third
parties, CASE STUDY CAPARO INDUSTRIES
- They have no contract with the audit firm, therefore no implied duty of care
- Individual shareholders, potential investors, the bank
- Banks and other major lenders
- Banks may document a relationship with the auditors to
establish that there is sufficient proximity and that a duty of
care exists.
- Banks may document a relationship with the auditors to
establish that there is sufficient proximity and that a duty of
care exists.
- Assurance Services
- The auditor should seek to create an engagement with bank itself
- Could create a conflict of interest
- Could create a conflict of interest
- The auditor should seek to create an engagement with bank itself
- Auditors duty of care
- The company has a CONTRACT with the auditor, which contains a
duty of reasonable care implied by statute.
- The company is all of the shareholders acting as a body
- An injured party must PROVE three things
- Seeks to provide compensation to a person who has suffered loss due to another person's
wrongful neglect.
- Disclaimers
- Since the Bannermann case, many audit firms have included a disclaimer in their audit report
- ACCA'S opinion on these is:- Their incorporation as a standard feature of the audit report could have the effect of devaluing
that report.
- ACCA'S opinion on these is:- Their incorporation as a standard feature of the audit report could have the effect of devaluing
that report.
- Since the Bannermann case, many audit firms have included a disclaimer in their audit report
- Litigation avoidance
- CLIENT ACCEPTANCE PROCEDURES
- PERFORMANCE OF AUDIT WORK
- QUALITY CONTROL
- ISSUE OF APPROPRIATE DISCLAIMERS
- ACCA's view is for auditors to carry out their audit work in accordance with auditing standards
- ACCA's view is for auditors to carry out their audit work in accordance with auditing standards
- ISSUE OF APPROPRIATE DISCLAIMERS
- QUALITY CONTROL
- PERFORMANCE OF AUDIT WORK
- CLIENT ACCEPTANCE PROCEDURES
- Restricting liability
- Professional indemnity insurance
- Insurance against civil claims made by clients & third parties
arising from work undertaken by the firm
- Fidelity Guarantee Insurance - Against liability through any acts of fraud or dishonesty by
any partner, director or employee in respect of money or goods held in trust by the firm.
- ADVANTAGES:- Provides funds for an innocent party to be
compensated in the event of a wrong having been done to them.
- Provides some protection to the auditor against bankruptcy
- DISADVANTAGES:- Might encourage auditors to take less care than
would otherwise be the case or that their professional duty requires.
- There are limits of cover, this could lead to partners
becoming bankrupt despite having insurance.
- There are limits of cover, this could lead to partners
becoming bankrupt despite having insurance.
- DISADVANTAGES:- Might encourage auditors to take less care than
would otherwise be the case or that their professional duty requires.
- Provides some protection to the auditor against bankruptcy
- ADVANTAGES:- Provides funds for an innocent party to be
compensated in the event of a wrong having been done to them.
- Fidelity Guarantee Insurance - Against liability through any acts of fraud or dishonesty by
any partner, director or employee in respect of money or goods held in trust by the firm.
- Insurance against civil claims made by clients & third parties
arising from work undertaken by the firm
- ACCA requirements
- Firms holding practising certificates & auditing certificates have
professional indemnity insurance with a reputable insurance
company.
- If the firm has employees, it must also have
fidelity guarantee insurance.
- Cover must continue to exist 6 years after a member ceases to engage in public practice
- Cover must continue to exist 6 years after a member ceases to engage in public practice
- If the firm has employees, it must also have
fidelity guarantee insurance.
- Firms holding practising certificates & auditing certificates have
professional indemnity insurance with a reputable insurance
company.
- Incorporation
- KPMG Incorporated their audit function as this was
allowed under the UK's Companies Act 1989
- An alternative to incorporation as a company is incorporation to a LLP
- LLP's are separate legal entities, with the flexibility and tax status
of a partnership with limited liability for members
- LLP's are separate legal entities, with the flexibility and tax status
of a partnership with limited liability for members
- An alternative to incorporation as a company is incorporation to a LLP
- KPMG Incorporated their audit function as this was
allowed under the UK's Companies Act 1989
- Advantages & disadvantages of different structures
- Partnership
- ADVANTAGES:- 1) Less regulation
2) Financial statements not on
public record
- DISADVANTAGES:- 1) Joint & several liability
2) Personal assets at risk
- DISADVANTAGES:- 1) Joint & several liability
2) Personal assets at risk
- ADVANTAGES:- 1) Less regulation
2) Financial statements not on
public record
- Incorporation
- ADVANTAGE:- Limited Liability
- DISADVANTAGES:- 1) Public filing of audited financial statements
2) Management must comply with Companies Act
- DISADVANTAGES:- 1) Public filing of audited financial statements
2) Management must comply with Companies Act
- ADVANTAGE:- Limited Liability
- LLP
- ADVANTAGES:- 1) Protection of personal assets
2) Limited liability of members 3) Similar tax effect
of partnership 4) Flexible management structures
- DISADVANTAGES:- Public filing of audited financial statements
- DISADVANTAGES:- Public filing of audited financial statements
- ADVANTAGES:- 1) Protection of personal assets
2) Limited liability of members 3) Similar tax effect
of partnership 4) Flexible management structures
- Partnership
- Professional indemnity insurance
- The expectations gap.
- ISA 240 sets out the current position on the auditor's responsibility to consider fraud.
- The gap between what users of auditors reports believe to be the purposes of
the audit compared with the actual nature of the assurance reported to them by
auditors.
- In recent years, there had been a focus on the role of auditors in evaluating whether a company is a going concern.
- High profile cases such as OLYMPUS CORPORATION have brought up the question of the extent to which auditors should
be responsible for detecting fraud, and how this differs from he way that the responsibilities of the auditor are perceived.
- NARROWING THE EXPECTATIONS GAP
- EDUCATING USERS:- The auditors report as outlined in ISA 700 includes an explanation of the auditor's responsibilities.
- Auditors could highlight circumstances where they have had to rely on directors representations.
- EXTENDING THE AUDITOR'S RESPONSIBILITIES:- Likely to make little difference to the detection of fraud.
- EXTENDING THE AUDITOR'S RESPONSIBILITIES:- Likely to make little difference to the detection of fraud.
- Auditors could highlight circumstances where they have had to rely on directors representations.
- EDUCATING USERS:- The auditors report as outlined in ISA 700 includes an explanation of the auditor's responsibilities.
- NARROWING THE EXPECTATIONS GAP
- High profile cases such as OLYMPUS CORPORATION have brought up the question of the extent to which auditors should
be responsible for detecting fraud, and how this differs from he way that the responsibilities of the auditor are perceived.
- In recent years, there had been a focus on the role of auditors in evaluating whether a company is a going concern.
- The gap between what users of auditors reports believe to be the purposes of
the audit compared with the actual nature of the assurance reported to them by
auditors.
- ISA 240 sets out the current position on the auditor's responsibility to consider fraud.
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