Question

Elaborate on the responsibilities of external auditors in relation to corporate corruption.

Answer 1

Responsibilities of external auditors in relation to corporate corruotion;-

In relation to fraud, theInternational Auditing and Assurance Standards Board ( issued the International Standard on Auditing SA.200 "Overall Objectives of the Independent Auditor and the

Conduct of an Audit in Accordance with International Standards on Auditing and ISA No.
240 the Auditor’s Responsibility Relating to Fraud in an Audit of Financial Statements.

Public Company Accounting Oversight Board also
issued Section 316 Consideration of Fraud in a Financial Statement Audit. However
none of these audit standards made a direct reference to external auditors’ responsibilities
with regards to corporate corruption which was only implicitly implied and in some instances
seemingly ignored, assuming that corruption has no impact on the financial statements.

As per SA 200,It is stated that,“external auditors are responsible for detecting material
misstatements whether due to errors or fraud” . Given that corruption is a type of
internal fraud , external auditors are likely responsible for detecting material
misstatements arising from it. However this was again ignored by SA 240, and SAS
99 that require external auditors to assess and respond to fraud risks arising from only two
types of internal fraud “asset misappropriation and financial reporting fraud”.

The auditor's responsibility to detect and report misstatements resulting from illegal acts having a
direct and material effect on the determination of financial statement amounts is the same as that for
misstatements caused by error or fraud. The auditor considers laws and regulations that are generally
recognized by auditors to have a direct and material effect on the determination of financial
statement amounts.

The lack of clarity about the responsibilities of external auditors with regards to corporate
corruption could make external auditors overcare their responsibility for detecting material
corruption which could have an impact on the financial statements,which increase auditors’ liability and litigation
costs.