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INTRODUCTION

In the market economy with fierce competition, the introduction ofnew types of business diversity, abundance , activity auditing functionverification and opinion on a show aimed at strengthening the inspectionand control , improve operational efficiency of enterprises increasinglyimportant role . At the same time, the market economy led to thedevelopment of complex problems, mix of real and financial status ofthe accounting profession .This fact requires the auditor must have

sufficient professional qualifications, the corresponding field operationsto perform its functions .The verification of financial information moredifficult leading to increased risk of audit.

In recent years, the case of audit firms is increasing in size, number, amount of defense , with the amount of cases that deal with theconsequences for the hundreds of millions of dollars . This has causedserious damage to the credibility of the audit profession.

In Vietnam ,the bankruptcy of a number of enterprises (includingSOEs ) in the past few years have posed a problem : The responsibilitiesof the auditors ( auditors ) and for audit firm reported audit report wasreleased like? In any case audit and audit firm to pay damages tocustomers and third-party for loss arising from the use of information inthe financial statements have been audited , auditors and audit firms to

do nothing to defend in a court case ? ...Research legal responsibilities of independent auditors is a crucial

issue to improve auditors' professional credibility , confidence for usersof audit reports , create peace center for auditors and audit firms during


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the audit , the lowest limit to the damage , unnecessary losses due tolawsuits caused .

Due to the importance of the study of independent audit liability

should they have chosen the topic " Legal liability of auditors and auditfirms to audit reports " to be my topic . With the understanding is stilllimited, resources are not rich , so diverse sure your project is very muchflawed . I would like to receive the comments of the teachers in theaccounting and auditing department school for my project is morecomplete .

Finally , I am very thankful to my lecture - Phan Trung Kien for helpingme to complete this project .


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ContentsINTRODUCTION ........................................................................................................................................ 1

Chapter1 The definition of Auditor's responsibility for auditors report ...................................................... 4

1.1 Concepts of auditors legal liability in audit firms ............................................................................... 4

1.2 Auditors legal liability classification ................................................................................................... 4

Chapter 2: The status of auditor's responsibility for auditors report in VietNam ....................................... 5

2.1 The status of auditor's responsibility for auditors report aboard ..................................................... 5

2.1.1 Some lawsuits related to legal liability of audit firm to the third party....................................... 5

2.1.2 The responsibility of audit firm for customers : .......................................................................... 6

2.1.3 Responsibility for security : .......................................................................................................... 7

2.1.4 Criminal liability : ......................................................................................................................... 7

2.2 The status of auditor's responsibility for auditors report in VietNam ............................................... 8Chapter 3: Some recommendations for the auditors responsible for auditors report ............................... 9

3.1 Some reasons why the increasing of the number of litigation in audit firm appears ........................ 9

3.2 The solution to prevent the increasing of the number of litigation in audit firm ............................ 12

3.2.1 Toward audit firm ...................................................................................................................... 13

3.2.2 Toward auditors ......................................................................................................................... 14

3.2.3 Toward authorities and VACPA .................................................................................................. 15

3.2.4 Auditors need to do to protect themselves when lawsuits happen ? . ..................................... 15

REFERENCES ........................................................................................................................................... 17


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Chapter1 The definition of Auditor's responsibility forauditors report

1.1 Concepts of auditors legal liability in audit firms Legal liability of Certified Public Accountants (CPAs) is the responsibility

of the accountant to the client and third parties relying on the accountant's work.Accountants can be sued for fraud and negligence in performance of duties.

In the United States, CPAs have common law liability and statutory lawliability. Common law liability arises from negligence, breach of contract, andfraud. Statutory law liability is the obligation that comes from a certain statute or alaw, which is applied, to society. Recoveries from these liabilities vary by theirsource or theory. Some of these theories are:

1.2 Auditors legal liability classification

Privity : CPAs and their clients enter into a contract with an agreement to perform certain services. Liability occurs when there is a breach of contract.

This applies to the CPA if they dont perform what they stated in theengagement letter and the client suffers damages.

Negligence : Negligence may be viewed as failure to exercise due professionalcare". Both clients and third parties can sue CPAs for the tort of negligence,which is a wrongful act, injury, or damage for which a civil action can be

brought. Negligence can be referred to as ordinary negligence and grossnegligence. Ordinary negligence is defined as failure of duty in accordance withapplicable standards, and gross negligence is the lack of concern for thelikelihood that injuries will result.

Fraud : Fraud is defined to be a misrepresentation of a material fact by a personwho is aware of his or her actions, with the intention of misleading the other

party with the other party injured as a result. Statutory liability : CPAs have statutory liability under both federal and state

securities laws. Statutory liability provides cover for defense costs, fines and penalties charged against the firm. Under statutory law, an auditor can be heldcivilly or criminally liable .
http://en.wikipedia.org/wiki/Privityhttp://en.wikipedia.org/wiki/Privityhttp://en.wikipedia.org/wiki/Negligencehttp://en.wikipedia.org/wiki/Negligencehttp://en.wikipedia.org/wiki/Fraudhttp://en.wikipedia.org/wiki/Fraudhttp://en.wikipedia.org/wiki/Statutory_liabilityhttp://en.wikipedia.org/wiki/Statutory_liabilityhttp://en.wikipedia.org/wiki/Statutory_liabilityhttp://en.wikipedia.org/wiki/Fraudhttp://en.wikipedia.org/wiki/Negligencehttp://en.wikipedia.org/wiki/Privity


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Chapter 2: The status of auditor's responsibility forauditors report in VietNam

2.1 The status of auditor's responsibility for auditors reportaboard

2.1.1 Some lawsuits related to legal liability of audit firm to the thirdparty.

In 1931 , the Company Ultrmares inability to pay debts , the creditors of thecompany based on the financial statements and then certified accountants fact, theysaid that the accountant was guilty of negligence and presented false . Receivableswere distorted by adding approximately $ 650,000 in accounts receivable $

700,000 on a different item. The creditors said that a thorough examination wouldfind this fraud $ 700,000 . The accounts payable account has the sameinconsistency.

After investigating the issue , the federal court concluded that the auditorwas negligent in the audit process , however, the auditor is not responsible for theCompany's creditors because Ultramares errors beyond the scope of the originalcontract audit. Court said that person have just signed a contract with the auditorfor audit services can have a ability to certify if these services are provide withcareless manner.

* Stephens industries litigate Haskin and Sells (1971 ) :

1971 , who bought two thirds of company stock car rental company suedStephens industries Haskin and Sells audit because the careless in receivablesaudit. However, under the contract , the audit data of the accounts receivable on the

books of the Company shall be kept intact and there is no adjustment in the auditreport , the auditors commented specifically stated : " According to terms of the

contract , we do not require customers to confirm their balance and did notconsider the possibility of any of the trade receivables . " The absence of anadjustment to reflect the amount collected is not specified in " notes in balancesheet " .


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Apply " Ultramares theory ," the court of first instance said that does nothave a personal relationship contract between the plaintiff and should not existauditors liability because of negligence of auditors . Court of Appeal also madesimilar decisions.

Currently theory " Ultramares " has been extended : for those who have nocontractual relationship with the auditors , but auditors will use that before thefinancial statements , then if for auditors negligence which caused damage to thethis person , auditors will be subject to liability .

Despite of the exist of the controversy surrounding the theory of "Ultramares " . Many people believe that whenever auditors the financial statementusers or not, auditors also bear liability that negligence , Auditor has caused

damage to a third party .

2.1.2 The responsibility of audit firm for customers :

CENCO Company Incorporated litigates Seidman and Seidman (1982 ) :

Between 1970 and 1975 , the administrator of CENCO , then the seniormanagement was involved in a major fraud that inflated the value of theCompany's inventory . This helped the company to get a loan with a lower interestrate and gain money compensate higher fire insurance rates deserve. After thefraud was discovered by an employee of CENCO and reported to the SEC (Securities and Exchange Commission ) shareholders have filed a lawsuit CENCOCompany , the Company's management and the auditors of the CompanyCompany. Company audit arrangements for this litigation by spending $ 3.5million .

Then , the new management of the company on behalf of the Company fileda lawsuit CENCO second audit firm for breach of contract , professionalnegligence and fraud . The auditor is defended despite efforts the Company hasattempted to detect signs of fraud , but most people who exercise in themanagement of the Company has prevented them CENCO found time fraud .

7th Session of the Supreme Court has concluded that the Company is notresponsible for the audit in this case . The wrongdoing of corporate governanceCENCO considered appropriate plea against allegations of breach of contract ,


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negligence and fraud whether the board is no longer working for the companyanymore .

2.1.3 Responsibility for security :

Fund of Funds Limited Company litigates ArthurArderse ( 1982) :

Fund of Funds Company is an investment company that specializes in buying mutual funds . In the late 1970s , the manager decided to diversify their business operations by making large investments in real estate of gas and oil .Approximately $ 90 million was spent on 400 mine put nature in a compromisewith King Resources Company. The agreement was signed by King ResourcesFund of Funds and provides that all property is sold on a turnkey basis with

satisfactory price for the two sides . An important event in this case is the auditingcompany Arthur Anderse audit for both the Company and King Resources Fund ofFunds to two separate contracts and audits for both two companies are run by thesame test the auditors conducted.

During the audit , the auditor found the real estate prices of gas and oilcompany for Fund of Funds Company higher prices for other customers of KingResources . The auditor did not report this information to the board Fund of Fundsand Fund of Funds management is not aware of the fact that in a long time. Fundof Funds Management Board that the Company is obliged to audit or notify themof violating or refusing to compromise either the audit. The auditor said that thecompany is responsible for information security under the terms of the ethics of theethics rules .

Federal Court decided auditing company to pay damages to the shareholdersof the Fund of Funds 80 million, the highest judgment for auditit firm to date atthat time.

2.1.4 Criminal liability :During the audit process , if there are auditors serious violation, the auditor

may be subject to criminal liability in the case SIMON conditions UNITEDSTATES (1969 ) : This case involves three auditors sued for submissions fakereport to a state agency violated the law and stock exchange in 1934 .


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End of this lawsuits, three auditors fined a total amount of 17000 USD andlost certification CPA under 501 of the ethics rules ( act of losing credibility ) andwas forced out of job . Then , they were pardoned Nixon .

It is a typical case occurred in the history of auditing activities . It can beseen that conflicts and disputes between the auditor and the use of information onfinancial reporting often occurs when people use information in the financialstatements regardless of whether damage was caused by one bug .

2.2 The status of auditor's responsibility for auditors report inVietNam

In Vietnam , although no lawsuit against audit firms , but recently , the phenomenon of businesses , including businesses bankrupted state tends toincrease, a question arises the auditor is responsible for how the audit report wasissued ?

So did the company claims auditing more and more ?

Although Vietnam doesnt has some lawsuits related to the audit company , but now need to consider this issue seriously , there should be coordination of theinternal audit activities in order to minimize the unfortunately the damage ,enhance professional reputation for financial statement users and create a legal

basis for the settlement of disputes , if any.

The auditor and the audit firm should try to implement the measures laid out, which need special attention to the issue of training for auditors have issued

professional qualifications meet the requirements of the audit .

About the authorities , first to perfect the system soon auditing standards .System auditing standards as a basis for the auditor to conduct the audit and main

bases to determine whether the auditor is responsible for the errors in the audit

report. Until now, the Ministry of Finance issued 37 audit standards , they are thecompletely basis in audit field.

The next problem is with the construction and improvement systemsauditing standards , the authorities need to consider cutting research issuedlegislation on liability of auditors and company audit accordingly . It is clear that inthe present situation , the auditing standards system is not fully developed , the


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legal documents on the issue of liability has not been issued , the legal experts andstakeholders will face embarrassment and trouble if a lawsuit occurs auditor . Wecan say no written law can not resolve the dispute in a satisfactory manner and

promptly .

The experience of countries that have developed audit activities as well asresearch on the nature of the cases the auditor of history shows that disputes

between businesses , the use of information on the financial statements and theauditor may occur in any aspect of the audit : It is possible that the security ,independence and objectivity of the auditor ; did not detect the fraud , mistake ,

breach of co ... So when the issue of the legal documents , the authorities shouldhave the detailed provisions , specifically to avoid misunderstandings and missedcases .

Chapter 3: Some recommendations for the auditorsresponsible for auditors report

3.1 Some reasons why the increasing of the number of litigationin audit firm appears

1. On the basis of a study of cases have occurred , many expert accountants

and legal experts say the main reason leading to lawsuits against audit firms stemsfrom ignorance users of financial statements about the difference between wrongwith wrong business audits , between wrong and audit risk audit .

Business mistakes happen when business can not afford to pay the debt orwhen business difficulties , does not meet the objectives of the investor . Causes of

business mistakes can be subjective or objective, for example, managers do nothave sufficient expertise to make bad management decisions , due to fiercecompetition and surprise rivals ... The worst case of business mistakes that

businesses fall into bankruptcy .

Mistake audit shall be construed as auditors mistake in making the audit program inappropriate or non-compliance with the provisions of auditing standardshas been recognized to lead to an erroneous conclusion audit.


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Audit risk is a concept indicating the existence (in the estimate or actual )material misstatement in the audit process . Audit Risks include potential risk,control risk and detection risk .

Risk is the potential existence of material misstatements in the audited objectitself ( not to mention the impact of any operation which audits including internalcontrol ) .

Risk control is the existence of material misstatement that the internalcontrol system does not detect and prevent in time .

Found that the risk of material misstatement exists that the audit system

undetected .

It can be seen that in any audit risks always exist undetected all materialmisstatements in the financial statements .. The audit was limited by the auditsample , more when the fraud was concealed carefully deliberate way even if it hascomplied auditors seriously the auditing standards is not well detect materialmisstatements .

" The standards and international accounting principles " admitted: "It's hard

to avoid the risk of audits , even documents that still does not explain the error wasdiscovered ." Clause 11 Vietnam Auditing Standards No. 250 also says "alwaysaudit risk audit is very difficult to detect all errors affecting critical to the financialstatements , even if the audit plan and proceed with caution , in accordance withauditing standards . Causes audit risk include:

The system of internal control and accounting systems of units do not meetthe full requirements of the laws and regulations related to the operation andfinancial reporting units .

internal control systems and accounting systems have limited potential in preventing and detecting violations , especially violations by failing tocomply with laws and regulations .

auditors use sampling methods . Evidence of audit judgments and often more convincing than the certainty .


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Unit may deliberately conceal their violations (eg, collusion, concealment ,forged documents , intentionally false accounting ... ) or deliberately

providing false information to auditors " .

So consider to professional activities, the need to take risks as an essentialaudit objectivity and independent auditing mistakes relative to business mistakes .In essence, only audit function to verify the authenticity and relevance of theinformation presented in the financial statements accurate and fair . Many people

believe that when the audit report is issued, it means the ability to finance thegrowth and development of the Company's audited completely guaranteed .Ignorance of the users of financial statements has led them to confuse the

responsibilities of the audit company and auditors lead to unnecessary litigation ,causing damage to both parties to the lawsuit.

The cause of the lack of knowledge is mainly due to the market economy , businesses are increasingly fiercer competition , attracting investment , loans fromcredit institutions play a role important in the development of the business. Toachieve its goals , businesses have used the phrase " financial statements audited "as an end , plus the FS does not use some information about the nature of the auditwork , the media has the wrong understanding of auditing mistake made by thosewho use financial statements becoming increasingly serious .

2.Speed economic development of the market economy countries arerelatively strong in recent years . Many types of business was born , and with it thedevelopment of computer technology . The classic method of accounting isgradually being replaced by the accounting methods more advanced but also morecomplex , which requires the auditors to have professional qualificationsrespectively . While training is not uniform auditors , auditor is the team leader andexperienced professional is not enough to meet the workload increasing , theauditor does not have enough young fledged professional inexperience shouldsuffer errors in the audit process is unavoidable .

Get trained technicians work in our country as an example. Currently, only ahandful of universities and major colleges new bachelor university audit as

National Economic ... The certification exam practice auditors uniform prescribed


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by the Ministry of Finance , however, the number of technicians certified to practice in our country is still very limited . The audits are usually conducted byyoung professionals. Auditor training program asynchronously and no standardtraining programs on a national scale. Most audit firms, especially foreign auditing

companies in Vietnam are trained technicians in a separate program in accordancewith the Company's experience and based on professional judgment , the objective,the company's point about how a auditors qualified professional match objectauditing .

3. Those who use financial statements that auditors should detect all errorsand fraud may have on the financial statements . In this regard , " The standardsand international accounting principles " stating " preventing and detecting anyfraud , errors are the responsibility of the business manager ," so it should not anddoes not auditors can ask discovered all errors and fraud .

4. General Psychology of the damage due to the use of financial statementsis the desire to be compensated regardless of who is at fault and the first object thatcomes to mind is usually the auditor .

3.2 The solution to prevent the increasing of the number oflitigation in audit firm

Audit activities related to the interests of many objects , especially veryclosely related to the interests of the business operations of the enterprise . Thus ,along with the affirmation increasingly important role of audit activities , the

problem of determining liability of auditors and audit firms in disputes , lawsuitsalso essential . The case of audit firms is increasing in size , the number and natureof complexity , the amount of damages and compensation . Faced with that reality ,the urgent issues raised is the auditors , audit firms , the authorities need to do inorder to minimize the cases by considering that the lawsuit does not cause damageto both the plaintiff and the defendant but also detract from the audit profession .And in the worst case , auditors and audit firms to the court , they need to do todefend yourself , minimize legal liability for the audited report was released ?Liability of auditors and audit firms should be applied in Vietnam how to fit thecurrent situation ? This is a complex issue needs a thorough study of the seriousauthorities , experts and legal audit . within the framework of the course project , Iwould like to set out some very general recommendations , preliminary issues :


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3.2.1 Toward audit firm

It is possible that the main reason causing the plaintiff 's case that the use offinancial statements due to the lack of understanding the nature of the auditfunction , they do not distinguish the fault of the business, where the auditor's fault . So the company audit , the auditors should coordinate with theauthorities , the mass media to take measures to improve understanding ofthe financial statement users , enabling them to see the difference between

business mistakes , errors and audit risk audit . The auditor should have strategic customer development and customer

classification match . Audit risk and liability of audit firms will increase asthe auditor for the audit received more notoriety businesses or businessactivities often have difficulty ... not only that the company received theaudit for audit firms also lowered the company's reputation . Therefore, theauditor should consider carefully studied before accepting the offer auditservices .

The auditor needs to train qualified technicians skilled , so companies needto have appropriate training and supervision of the organization of theauditors rigorously , seriously . Currently, the team is not enough braveryauditors young and inexperienced business is relatively large , so to ensure

the quality of audits and auditors help the children with actual friction , theauditor is necessary to the right job , the layout auditors experienced mentorand supervise them in the audit process .

The audit firm should take all necessary measures to ensure that all membersof the company have mastered the professional standards of business

processes and the legal documents involved. The audit firm should keep careful audit appointment letter, contract audit ...

because these are important documents in responsibilities, and obligations of

auditors and business and is evidence of validity when brought before thecourt.

The audit firm needs to have good legal advice in order to help the companyin any given moment, especially when the unfortunate happens disputes.

The audit firm should purchase appropriate insurance for each and everyaudit lawsuits. This work is essential to avoid damage to the company.


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3.2.2 Toward auditors First of all , technicians must regularly cultivate self- knowledge , improve

professional and timely grasp of standards changes , the legal documentsrelating to the profession , to train themselves to be deeper understanding of

the various business areas for the audit profession , auditors will collide withmany types of business .

Absolute compliance with professional standards in the absolute need torespect three basic principles of an CPA is independent, impartial andconfidential.

Technicians to maintain the independence of the audit: an independentinvestigation , independent judgments and conclusions read up . Auditor need allthe skepticism and only allowed to believe in yourself, do not let the materialinterests or pressures that dominate .The fact that some 40 % of cases are caused

by auditor too easy to accept the explanation of the pressure customers andmaterial should have made a mistake.

Auditors should have sufficient knowledge and concepts accurately secret to avoidunnecessary litigation ( as in the case of Fund of Funds Ltd. Arthur Anderse eventin 1982 and the company mentioned above ) .

Auditor need to fully understand the characteristics of business customers ,such as organizing field operations ... Lack of understanding of the businessof customers will make embarrassing auditor in the audit process and thussusceptible to errors .

Auditor should strive to achieve a quality audit : a quality audit requiresauditors to gather sufficient audit evidence and appropriate , since it is thelightning that are reasonable . At the time of the audit process , auditors needto appreciate the performance of internal control system so that there aremethods to collect appropriate evidence .

Auditors record , store and use good paper work in the audit process toensure that the audit was conducted in a scientific manner , on schedule .And when it is necessary, the working papers used as evidence in a legaldispute .


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3.2.3 Toward authorities and VACPA Need to regularly review the complete, revised audit rules, norms and

principles profession: general business and financial operations in particularare constantly changing and becoming more complex magazine, so for audit

activities more aligned with the business situation of enterprises, thestandards need to be developed consistent, timely, as a basis for our audit.

There are useful measures for monitoring the macro-audit activities on anational scale. Construction and completion of legal documents whichshould detail the responsibilities of the parties involved when there is adispute, cause of action in each case.

The auditing associations should develop regulations to protect auditors .These regulations shall not be inconsistent with the laws and still meet the

needs of those who use audited . Develop regulations on cross-examination in order to enhance the quality of

audit work .

3.2.4 Auditors need to do to protect themselves when lawsuits happen ? .In the opinion of many jurists and experts independently audit the unfortunate

case to defend themselves in court , auditors need to thoroughly exploit andmanipulate the following 4 ways to defend themselves :

The condition of the plaintiff which are not part of the contract auditor is notresponsible . For example, if invited auditors audited by special request, notaudited annual financial statements , the auditor accepts no responsibility forthe audit report . Most valuable evidence to save themselves auditor is fullydocumented " audit appointment letters " , " Explanation of theAdministration " " Or Contract Auditing " ... The lawyer said that " the auditappointment letter " is the most powerful evidence is the highest legal value

because there are clearly defined corporate responsibility and accountability

of auditors . Auditors must try to prove in court that the audit was conducted inaccordance with professional standards and regulatory documents individualconcerned . If there is fraud or misrepresentation is not legal , it is not thefault of the auditors of the entire record in the auditor's working papers . Onthe other hand standards also recognize that the responsibility for preventing


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and detecting fraud and all the errors are not the auditors that themanagement of the business .

CONCLUSION

Nowadays, in the world, Auditing field is facing major challenges. Thelawsuit audit companies are increasingly affecting the credibility of the audit

profession, the issue of expanding liability of auditors and audit firms frequentlymentioned. So to ensure occupational prestige, enhancing the role of audit activityin the market economy, to minimize damage in the case, in each country, theauditor, the auditor and auditing associations should have the right solution to

protect themself and protect careers.

In Vietnam, it is no small omission if until now the problem of liabilityindependent auditors are not given seriously to study. Experience in developedcountries shows that auditors and audit firms are more thorough methods of "activedefense" much earlier, with the improvement of the system and the audit standardslegal documents, the system will limit the unnecessary loss, enhance the reputationof the auditing profession much.


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REFERENCES

1. International Auditing Standard

2. VietNamese Auditing Standard

3. Nguyen Quang Quynh & Ngo Tri Tue, 2012, Financial Auditing, 3 rd

Edition, National Economics University

4. Arens, Elder & Beasley, Auditing and Assurance Services, 14 th Edition.

Auditors legal liability in audit firm in Vietnam

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