Question

Explain the legal basis for a cause of action against an auditor. What are the defenses available to the auditor to rebut such charges? How does adherence to the ethical standards of the accounting profession relate to these defenses?

Answer 1

Solution:-

The legal basis for a cause of action against an auditor stands on several unique principles. First, the client must prove the accountant accepted a duty of professional care to exercise his activities. Then, the client must show the CPA breached their duty of due professional care through a form of negligence. Next, from this negligence the client must show that they incurred damages. Last, that the losses or damages had a causation or proximate cause from the CPA’s negligence.

The main causes of action against an auditor include negligence, fraud and breach of contract. Auditors are a highly important asset to every company and they are held up to very high standards. Auditors are trusted to report fairly and are responsible for enhancing the reliability of financial statements so it is extremely important for auditors to not be negligent, get involved in fraudulent activities or breach their contracts. When a client is trying to sue an auditor they must prove that the auditor accepted the duty to exercise with care and diligence. If the auditor were to breach their duty of professional care through negligence, that would be a cause of action against the auditor.