(Objectives 5-3, 5-4, 5-5, 5-6) Following are 8 statements with missing terms involving auditor legal liability.
1. A third party lacking privity will often be successful in bringing a claim against the auditor if they can demonstrate ___ or ___.
2. Under the Ultramares doctrine, an auditor is generally not liable for ___ to third parties lacking ___.
3. The auditor will use a defense of ___ in a suit brought under the 1933 Securities Act.
4. Under the 1933 Act, plaintiffs do not have to demonstrate ___, but need merely demonstrate the existence of a ___.
5. After passage of the Private Securities Litigation Reform Act, auditors generally have ___ liability in federal securities cases.
6. The broadest class of third parties under common law is known as ___.
7. Based on the ruling in Hochfelder v. Ernst&Ernst, an auditor generally must have knowledge and ___ to be found guilty of a violation of Rule 10b-5 of the 1934 Act.
8. ___ is generally only available as a defense in suits brought by clients.
Terms
a. Due diligence
b. Reliance on the financial statements
c. Fraud
d. Ordinary negligence
e. Separate and proportionate
f. Contributory negligence
g. Intent to deceive
h. Privity of contract
i. Gross negligence
j. Foreseen users
k. Material error or omission
For each of the 11 blanks in statements 1 through 8, identify the most appropriate term. No term can be used more than once.
Objective 5-3
Use the primary legal concepts and terms concerning accountants’ liability as a basis for studying legal liability of auditors.
Objective 5-4
Describe accountants’ liability to clients and related defenses.
Objective 5-5
Describe accountants’ liability to third parties under common law and related defenses.
Objective 5-6
Describe accountants’ civil liability under the federal securities laws and related defenses.
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