5-23
a) Yes. He did not have a contractual relationship with them but they can sue Chen based on fraud. They need to prove that there was a material misstatement, knowledge and intent, and injury.
b) NO, because the lessor war party to the secret agreement. They have “unclean hands.”
c) Yes. If you are knowingly involved in fraudulent f/s you become subject to criminal liability and jail time.
5-24
. 1. c Both. Material misstatements must be shown under both acts. 2. c Both. Monetary loss must be demonstrated under both acts. 3. d Neither. Plaintiff does not have to prove lack of diligence under the 1933 Act, but the accountant can use due diligence as a defense. Scienter must be demonstrated under the 1934 Act. 4. d Neither. Privity applies to common law and not the 1933 and 1934 acts. 5. b 1934 Act only. Reliance is not required under the 1933 Act. 6. b Scienter is required under the 1934 Act, but not the 1933 Act.
6-23
a) Auditors are responsible for obtaining reasonable assurance that material misstatements included in the financial statements are detected, whether those misstatements are due to error or fraud. Professional standards acknowledge that it is often more difficult to detect fraud than errors because management or employees perpetrating the fraud attempt to conceal the fraud. That difficulty, however, does not change the auditor’s responsibility to properly plan and perform the audit. Auditors are required to specifically assess the risk of material misstatement due to fraud and should consider that assessment in designing the audit procedures to be performed.
b)
c) The responsibility of the independent auditor is to express an opinion on the financial statements he or she has audited. Inasmuch as the financial statements are the representation of management, responsibility rests with management for the proper recording of transactions in books of account, for the safeguarding of assets, and for the substantial accuracy and adequacy of the financial statements. In developing the basis for his or her opinion, the auditor is responsible for conducting an audit that conforms to auditing standards. These standards constitute the measure of the adequacy of the audit. Those standards require the auditor to obtain sufficient, appropriate evidence about material management assertions in the financial statements.
d)
e) If an independent auditor uncovers circumstances arousing suspicion as to the existence of fraud, he or she should weigh the effect of the circumstances on the opinion on the financial statements. When the auditor believes that the amount of the possible fraud is material, the matter must be investigated before an opinion can be given. The auditor should consider the implications for other aspects of the audit and discuss the matter with an appropriate level of management that is at least one level above those involved and with senior management. Additionally, the auditor should obtain additional evidential matter to determine whether material fraud has occurred or is likely to have occurred. The auditor may suggest that the client consult with legal counsel. Whenever the auditor has determined that there is evidence that fraud may exist, that matter should be brought to the attention of the audit committee (or equivalent), unless the matter is clearly inconsequential
6-27
a) Management assertions are implied or expressed representations by management about the classes of transactions and related accounts in