Question

Question:

The auditor is required to express an opinion on a set of financial statements. Audit risk is the probability that the auditor will express an incorrect opinion resulting in financial loss to persons acting upon the audit opinion given. There are laws and regulations in place which provide protection for stakeholders who suffer losses from reliance on the auditor’s report which may be found “lacking”.

In reference to the legal and regulatory framework of the auditing profession, what are the circumstances under which you may consider the audit report to be “lacking” and the auditor liable for financial losses suffered by stakeholders? Do you believe that the laws and regulations provide sufficient protection for the auditor carrying out his/her professional duty with due diligence and care or do you perceive an imbalance in favor of the stakeholders?

Required:

Discussion on the issues outlined above in relation to the rights, responsibilities and obligations / liabilities of the auditor.

Answer 1

Solution: Yes, the laws and regulations provide sufficient protection to the auditor if the auditor has performed the duty objectively and professionally to the best ability and the best information he acquired from the companies database. In case, the auditor was not able to track out some key data for evaluation from company officials then he is not at fault or he is not guilty. The role of the auditor is to evaluate and verify the financials which are present in front of him. If the company hides any crucial data then the auditor is not at fault but if it is realized that the auditor intentionally ignored some facts due to carelessness or any own involvement in the fraud. Then he is guilty on personal grounds.

Rights of an auditor

(1) He can demand all the financial books of the company.

(2) He can inspect or inquire the things from officials and concerned department if required.

(3) He can demand clarification in case of any misstatement of facts and figures.

Note: If the auditor did not demand clarification even after knowing the fact that something is wrong or missing. In such a case, he is guilty.

Responsibilities & Obligations of an auditor

(1) Examine and verify the financials under the purview of standards and accounting rules.

(2) Preparation of audit reports under the purview of law

(3) Stating the core aspects of qualification and disqualification of reports.

Note: If the auditor did not examine or ignore financials validity under legal norms then he is guilty.

Example: In India, recently a Fraud came into existence ( 2018). Punjab National Bank (PNB), India's second largest Public sector bank is hit by a scam worth $ 1.8 Billion. The bank officials were issuing a fake letter of the undertaking to some businessman to get goods on credit without intimating the senior bank management. This was happening since 2011. It was concluded that the auditors were also involved in the respective case because during the examination of accounts they have never demanded clarification on issuing a letter of credit without examining the creditability of account holder.