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Chapter 5 - Legal Liability.docx

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University of Guelph
ACCT 3280

Chapter 5 Legal Liability The Legal EnvironmentLaw is a social system for solving conflictsPrivate or civil lawconflicts between individuals corporations settled in courtPublic lawdisputes between an individual and the states those in between states or different levels of governmentPublic law includes criminal law administrative law and constitutional lawPublic law codified by statute passed to some level of governmentCommon lawsystem of law based on previous judicial decisions Public law laws have not been codified in statues through legislationMajor categories of civil law contracts agreements or promises that create expectations for others torts civil wrongs that create obligations got the offending party and property rights over goods and landCommon law liabilities for auditors arise in contracts and tortsStatutory liabilities for auditors arise from administrative law related to economic relations and criminal chargesSOX is an example of statutory law Lawsuit cases and frequencyOne study of law cases that accountants and auditors legal troubles arose from 5 types of major error 1 Misinterpretation of accounting principles 2 Misinterpretation of auditing standards 3 Faulty implementation of auditing procedures 4 Client fraud 5 Fraud by the auditor About 60 percent of civil damage arise from tax practice disputes Audit responsibilitiesAuditors take responsibility for detecting material misstatements in financial statements very cautious about taking responsibility for detecting fraud and especially cautious about accepting a public reporting responsibilityCommon law is common knowledge in the sense that judges tend to follow the collective wisdom of past casesStatutory law is prohibitions enacted in statutes by a legislature Code law systemscountries in which the law arise from legislation statutory rather than common lawBefore Enron major source of liability for PAs was under common law
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