Audit and financial statement errors.

This page is about a CPA’s work on financial statements, not an IRS examination. For problems with a tax return or an IRS audit, see tax preparation errors.

Accountants do several different kinds of financial statement work, and each carries different responsibilities. Arizona’s accountancy law, for example, defines attest services to include:

• Audits performed under the auditing standards adopted by the American Institute of Certified Public Accountants
• Reviews of financial statements
• Examinations of prospective financial information, and other examination, review, or agreed-upon procedure engagements
• Engagements performed under the standards of the Public Company Accounting Oversight Board

It treats compilation services as a separate category (A.R.S. § 32-701). Florida’s definition of public accounting likewise includes expressing an opinion on financial statements (Fla. Stat. § 473.302(8)).

The SEC describes an auditor as an independent certified public accountant who examines the financial statements a company’s management has prepared. The auditor gives a written opinion on whether the statements are fairly stated and comply in all material respects with generally accepted accounting principles (GAAP). Audit procedures “may include inspection of the company’s books and records, observation, inquiries, and confirmations” (SEC: All about auditors).

So an audit is an opinion reached by testing, not a line-by-line check of every transaction. An audit that didn’t find a problem isn’t automatically negligent. The question is whether the auditor did what the standards for that engagement required and should have found it.

• A material misstatement in the financial statements that the audit didn’t catch
• Theft or embezzlement that continued through one or more audits
• Too little evidence gathered, or warning signs that weren’t followed up
• Financial statements prepared with errors in how transactions were recorded or presented
• A clean report issued when the evidence didn’t support one
• Confusion about the level of service, such as a business that believed it was getting an audit when it had agreed to a compilation

The SEC notes that “a company’s management has the responsibility for preparing the company’s financial statements and related disclosures” (SEC). That matters in these cases. Attorneys look at what the company’s own people knew, what they told the accountant, and what the accountant should have spotted anyway.

States differ in how a client’s own role affects a claim, which is one more reason to talk with an attorney licensed in your state.

Audited statements are meant to be relied on. The SEC says an audit gives additional assurance that financial statements “can be relied upon,” which matters to investors, to banks and lenders deciding whether to extend credit, and to others who deal with the company (SEC).

Whether someone other than the client can bring a claim depends on state law. Illinois, for example, limits accountant liability to people not in privity of contract, with exceptions for fraud or intentional misrepresentation and for people the accountant knew the client primarily intended the work to benefit or influence (225 ILCS 450/30.1). Florida’s two-year limit for professional malpractice “shall be limited to persons in privity with the professional” (Fla. Stat. § 95.11(5)(b)).

• The engagement letter, which sets out whether the work was an audit, a review, a compilation, or something else
• The report the accountant issued, and the financial statements it covered
• The accountant’s workpapers, which show what was tested and what was found
• How and when the problem came to light, and who knew what inside the company
• How the statements were used, such as for a loan, an investment, or a sale

These cases usually depend on an independent accountant who can explain what the standards required.

• Engagement letters for each year involved
• The issued audit, review, or compilation reports and financial statements
• Letters or memos the accountant sent the company about internal controls or problems found
• Loan agreements, investment documents, or other papers showing who relied on the statements
• Records showing when the problem was discovered

Workpapers often belong to the accountant. In Florida they remain the CPA’s property, apart from reports submitted to the client and records that are part of the client’s records, unless agreed otherwise (Fla. Stat. § 473.318). Arizona requires a registered CPA or firm, on request with reasonable notice, to furnish copies of workpapers to the extent they include records that would ordinarily be part of the client’s records and aren’t otherwise available to the client (A.R.S. § 32-744).

We wrote this page from the primary sources below and checked it against them on September 25, 2026.

• SEC, All about auditors: what investors need to know: the auditor’s role and who relies on audits
• A.R.S. § 32-701: attest and compilation services
• A.R.S. § 32-744: working papers and client records
• Fla. Stat. § 473.302: definition of public accounting
• Fla. Stat. § 473.318: ownership of working papers
• Fla. Stat. § 95.11(5)(b): professional malpractice time limit and privity
• Florida DBPR, Certified Public Accounting: Division of Certified Public Accounting
• A.R.S. § 32-742.01: board investigations
• 225 ILCS 450/30.1: accountant liability to people not in privity

We are not attorneys, and this page is not legal advice. Laws change and differ from state to state. If anything here is out of date or wrong, email support@malpracticeattorneys.com with the page name, and we’ll review it and update the page.