Question

Describe the responsibilities of auditors for errors, omissions, material fraud, illegal acts, and provide examples.

Answer 1

Answer :

1. It is the primary responsibility of the management for prevention and detection of frauds and errors.Auditor responsibility is to express an opinion on the financial statements whether they are materially misstated or not. Hence, it is the secondary responsibility of the auditors to detect frauds and errors.

2) Error is an unintentional mistake whereas fraud is an intentional act.

3) Example -- Error : Actual Collection from debtor is $5,000, whereas it is entered in the books as $50,000. This is an example for error.

               ---- Omission : Check received from a customer is deposited in the bank but not entered as deposited in the books of accounts .

Responsibilities :

In both the cases above, auditor responsibility is to identify whether those errors or omissions materially effect the financial statements. If they are material, he has to report to the management and ensure that they are rectified.

     Example ---Material Fraud : Amount received from a customer is misappropriated and the amount received from another customer is applied against balance of the customer whose amount is misappropriated. (Teeming and Lading)

               --- Illegal Act : Creation of fake documents to avail loan from banks or financial institutions.

Responsibilties :

In both the cases above, auditor responsibility is to report to the management and if necessary to the Those Charged with Governance. If the auditor is not satisfied, then he should make modifications in his audit report.