Question

Steve Woods performed an audit on the ABC corporation and issued an unqualified report. Steve performed the audit with due care and in accordance with GAAS. Three months later, he discovers on the news that the CEO of ABC, has been stealing small amounts of inventory. The amount was not material compared to the overall inventory of the corporation. The CFO, Mr. Big called Steve and he asks for Steve to refund the audit fees because Steve did not perform the audit properly and discover this fraud. How should Steve Woods, auditor, respond? Please write at least 300 words.

Answer 1

An auditor is responsible for obtaining reasonable assurance that the financial statements taken as whole are free from material misstatement, whether caused by error or fraud. The general objective is to find whether the accounts show a true and fair view.

The primary responsibility for prevention and detection of fraud with those charged with governance of the entity and management. It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment.

Here in the case Steve woods auditor of ABC corporation performed an audit and issued an unqualified report. Steve performed the audit with due care and in accordance with GAAS.

If the CEO of ABC corporation or any other employee commit fraud or opting unethical behaviour then its duty of management to prevent and detect these kind of activities. For any reason if management fails to prevent these then auditor should detect these activities and report to the management.

In this case audit was completed and also unqualified report issued by the auditor. That means during the audit period there is no such kind of activities are running (like fraud, error etc). Discovering of stealing was three months later that means after issuing of audit report.

Auditor needs not to refund the audit fees. Discrepancies arise were after the audit period and will be reported on next year's audit report.