2.
A company engaged a CPA to perform the annual audit of its financial statements. The audit failed to reveal an embezzlement scheme by one of the employees. Which of the following statements best describes the CPA's potential liability for this failure?
a. The CPA's adherence to generally accepted auditing standards (GAAS) may prevent liability.
b. The CPA will not be liable if care and skill of an ordinary reasonable person was exercised.
c. The CPA may be liable for punitive damages if due care was not exercised.
d. The CPA is liable for any embezzlement losses that occurred before the scheme should have been
detected.
Choice "a" is correct.
A CPA will be liable in negligence if he or she fails to exercise the care and prudence that an ordinary CPA would exercise in performing an audit. An ordinary CPA would normally adhere to GAAS. Thus, proof of adherence to GAAS may prevent liability.
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