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 reportto 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:

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

Answer 1

Issue :

To ascertain the circumstances in which you may find the auditor's report lacking. Who is safeguarded by law & regulations ? Is it the auditor or the stakeholders ? Or an imbalance in favour of stakeholders ?

Explanation :

1. The objective of the auditor while conducting an audit is to provide reasonable assurance about whether the financial statements as a whole are free from material misstatements.

The audit though, does not relieve management from its responsibilities.

2. Rights of an auditor : They have right to access books of accounts, right to call for information required while conducting audit, right to make enquiries about aspects which they might find suspicious,etc

3.Duty of an auditor include : duty to carry out an audit without being biased, audit with following the code of conduct, to give a true and fair view of the financial statements laid before any meeting, follow professional skepticism attitude towards audit, plan the things properly, duty to report on fraud if any.

4.The stakeholders are basically the owners of the company, but as they are wide spread, management of the company is handed in the hands of directors appointed by stakeholders. The directors are responsible to appoint a qualified auditor without being biased, in order that the stakeholder's interests are protected.

5.Circumstances in which the audit report may be considered lacking :

a) where a person has subscribed for any securities relying on a fact stated in the audit report which was misleading or false and that person has suffered a loss. The auditors and other management people if involved will be liable to indemnify the loss.

b) where a person had acting on the financial statements & auditor's report has made an investment , later they find that some facts were hidden and not stated in the reports which were material, then the auditor & other management people may be liable if involved.

6. Yes, the law provides sufficient protection to the auditor.

The auditor is responsible only to duly conduct the audit of books given or placed before him. If suppose later on it is discovered that the company which the auditor carried out an audit for maintains two sets of books, one for auditing with few legal transactions and other for all black transactions. Then, in such case as the auditor was given only the legal transactions book, he will be responsible to express an opinion only on those books. The other part of books of accounts should be found out by the tax authorities as it is their duty & not that of the auditor.

7. The auditor has got a right to leave the audit if he finds that circumstances so ascertain or if he is not able to find sufficient appropriate audit evidence, to give a disclaimer of opinion on the financial statements. He/she has also got a right to report on such frauds or events to the management which materially affect the company's position.

8. The stakeholders have also been protected by laws. The Doctrine of Indoor management is the prime law that protects the stakeholders. That law lifts the true faces behind the frauds of the company. Investors grievances commitees are formed. The stakeholders can also inspect books of accounts under specific circumstances. There are cases in which the investors of minority are protected against majority.The government in certain cases may call for an audit on a complaint made by stakeholders.

Conclusion :

So, basically both the stakeholders & the auditors are prevented by the laws & regulations.The management acts like an intermediary between both. The auditor as well as the stakeholders play a vital role for the smooth running of the company. One finances funds to run the business effectively while the other takes due care of whether thise financed funds are used properly.