External
Content
external auditing profession, the need for audit
quality, the challenges that fraud poses for auditors,
and management’s responsibility to ensure reliable
financial reporting through effective internal controls.
In this chapter, we discuss the legal environment in
which auditors operate and we explore what litigation
they might face, should they fail to perform quality
audits. Even though most audits are performed in a
quality manner, a large percentage of the revenues of
external audit firms is spent on litigation-related costs.
Litigation costs have caused some of the world’s largest
audit firms to declare bankruptcy, so it is extremely
important that auditors use due professional care and
provide quality audits to minimize such costs.
Following the discussion on litigation, we introduce a
framework for professional decision making and a
framework for ethical decision making that, when
applied effectively, help auditors to avoid the risk of
litigation.
Through studying this chapter, you will be able to achieve these learning objectives:
1. Discuss the liability environment in which auditors
operate and explore the effects of lawsuits on
audit firms.
2. List laws from which auditor liability is derived and
describe the causes of legal action against
auditors.
3. Describe possible causes of action, remedies or
sanctions, and auditor defenses under both
common law and statutory law.
Source: Karla M. Johnstone
University of Wisconsin—Madison
Audrey A. Gramling
Bellarmine University
Larry E. Rittenberg
quality, the challenges that fraud poses for auditors,
and management’s responsibility to ensure reliable
financial reporting through effective internal controls.
In this chapter, we discuss the legal environment in
which auditors operate and we explore what litigation
they might face, should they fail to perform quality
audits. Even though most audits are performed in a
quality manner, a large percentage of the revenues of
external audit firms is spent on litigation-related costs.
Litigation costs have caused some of the world’s largest
audit firms to declare bankruptcy, so it is extremely
important that auditors use due professional care and
provide quality audits to minimize such costs.
Following the discussion on litigation, we introduce a
framework for professional decision making and a
framework for ethical decision making that, when
applied effectively, help auditors to avoid the risk of
litigation.
Through studying this chapter, you will be able to achieve these learning objectives:
1. Discuss the liability environment in which auditors
operate and explore the effects of lawsuits on
audit firms.
2. List laws from which auditor liability is derived and
describe the causes of legal action against
auditors.
3. Describe possible causes of action, remedies or
sanctions, and auditor defenses under both
common law and statutory law.
Source: Karla M. Johnstone
University of Wisconsin—Madison
Audrey A. Gramling
Bellarmine University
Larry E. Rittenberg
