Question

Differentiate between an auditor's ethical responsibility to detect errors, fraud, and illegal acts –

What is your ethical responsibility? How are these responsibilities different?

Answer 1

It is the prime and ethical responsibility of auditor to obtain reasonable assurance with regard to financial statements that whether financial statements are free from material misstatement or not. Material misstatement may be there in financial statements due to any fraud or error. Auditor should use professional skepticism, a questioning mind, and critical analysis to detect any fraud or error in financial statements. Auditor should implied test of control to check any fraud or error. For example, with regard to safeguarding of cash, Person who has the physical custody of cash should be different than the person who is handling cash records. Auditor should employ test of control for cash and check whether both person are different or not. If both person are same then that person may commit any fraud. He can be easily involved in the pilferage or theft of cash and at the same time, he can alter cash records to match it with physical balance.

Auditor should focus on illegal acts that would have direct effects on the financial statements. Indirect illegal acts require disclosure only and may result in fines and penalties.

Auditor should provide qualified or adverse report in the case where material misstatement has been found in the financial statements. Where the case is not of material misstatement but somehow it affects the decision of stake holders in the company then auditor should provide it under "Emphasis of matter" in Audit report.