Case 4.6 Phar-Mor, Inc.

Topics: Auditing, Financial audit, Audit Pages: 2 (614 words) Published: September 26, 2013
2. A) A client can be put in a more powerful position than the auditor in an auditor-client relationship if the auditor is trying to sell the client additional services. B) According to SOX external auditors are prohibited from providing certain services to clients: book keeping or other things related to the accounting records or financial statements of the audit client, they are not allowed to design and implement financial information, appraisal or evaluation services, internal audit outsourcing services, investment banking services, legal services and expert services unrelated to the audit. 3. A) If I were put in this situation as an equity investor, I would absolutely pursue legal actions against the auditors. If there was a reckless misrepresentation and lack of due diligence in verifying accuracy of financial information that is free of material misstatements, that alone would give me a reason to sue the auditors. B) Negligence as it is used in legal cases involving independence auditor is defined as “failure to conduct an audit with due professional care in the performance of work” C) The primary difference between negligence and fraud is fraud is the intentional concealment or misstatement of information with intent, while negligence is the lack of attention to detail, that results in material misstatement. Recklessness is when one disregards certain principles or standards during an audit and does not find any fraud. 4. A) The auditors are the only ones who are liable for negligence to a third party who are in contract or primary beneficiaries. Auditors were held liable only under the condition that the auditors know the third party will see their work product and will rely on the work product for a particular known purpose. The third party would have to prove that the auditor exercised fraudulent conduct , reckless misstatement, or had no genuine belief in the facts of the audit. B) Based on the consensual relationships and privacy established,...
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