62 MODULE 21 PROFESSIONAL RESPONSIBILITIES

(c) Accountant is not an insurer of financial statements and thus does not guarantee against
losses from fraud
1] "Normal" audit is not intended to uncover fraud, shortages, or defalcations, in general
but is meant to provide audit evidence needed to express opinion on fairness
of finan-
cial statements
(d) Accountant is not normally liable for failure to detect fraud, etc. unless
1] "Normal" audit or review would have detected it, or
2] Accountant by agreement has undertaken greater responsibility such as defalcation au-
dit, or
3] Wording of audit report indicates greater responsibility
EXAMPLE:.A CPA has been hired by a client to perform an audit. A standard engagement letter is
used. During the course of the audit, the CPAfails to uncover a clever embezzlement scheme by one
of the client's employees. The CPA is not liable for the losses unless a typical, reasonable audit
should have resulted in discovery of the scheme.
(e) In an audit or review of financial statements, accountant is under duty to investigate when
s/he discovers or becomes aware of suspicious items
1] Investigation should extend beyond management's explanations
(2) Client should not interfere or prevent accountant from performing
EXAMPLE: A CPAfirm issues its opinion afew days late because of its client'sfailure to supply needed
information. The CPA firm is entitled to the full fee agreed upon under the contract (engagement).
(3) When breach of contract occurs
(a) Accountant is not entitled to compensation if breach is major
EXAMPLE: M failed to complete the audit by the agreed date. If time is of the essence so that the client
receives no benefit from the audit, Mis not entitled to compensation. .
(b) Accountant is entitled to compensation if there are only minor errors but client may deduct
from fees paid any damages caused by breach
(c) Client may recover any damages caused by breach even if accountant is not entitled to fee
(d) In general, punitive damages are not awarded for breach of contract .
b. Liability to clients based on negligence
. (1) Elements needed to prove negligence against accountant
(a) Accountant had duty to perform with same degree of skill and judgment possessed by av-
erage accountant
1] This is the standard used in cases involving ordinary negligence (or simply called neg-
ligence)
a] Different phrases are used for this standard, that is,
i] Duty to exercise due care
ii] Duty of skill of average, reasonable accountant (or CPA)
iii] Duty to act as average (or reasonable) accountant (or CPA) would under
similar circumstances
iv] Duty of judgment of ordinary, prudent accountant (or CPA)
2] Standard for accountants is guided by
a] State and federal
statutes
b] Court decisions
c] Contract with client
d] GAAS and GAAP (persuasive but not conclusive)
i] Failure to follow GAAS virtually establishes lack of due care but reverse not
true (i.e., following GAAS does not automatically preclude
negligence but is
strong evidence for presence of due care)
e] Customs of the profession (persuasive but not conclusive)