Question

When we are in a lawsuit that a loss was incurred by Third-party due to reliance on misleading financial statements. The auditor has the burden of demonstrating as a defense that an adequate audit was conducted. So how we can prove that we already do an adequate audit? Is the court will suporting the auditor or not when the laypeople with no accounting experience make up the jury.? explain please

Answer 1

If an auditor has conducted audit of financial statements and any third party interested in the statements of the entity whose audit had been carried out suffered any loss due to reliance on information given in financial statements, then the audior liable to audit will also be answerable to such loss. However, if the auditor proves that he has conducted audit to his best and after applying all relevant principles and with due care, then such auditor can not be held liable. It is because an auditor is not supposed to do investigation of books of an entity. He is supposed to give a True & Fair View on financial statements that these statements are free from material misstatements. He does not give assurance to the users about accuracy of financial statements.

              So, the burden to proof is upon the auditor. Auditor in the lawsuit can prove that he has done an adequate audit after presenting valid evidences in the court. Such evidences can be:-

1. Sufficient & Appropriate Audit Evidence:- a large part of work involved in performance of audit consists of obtaining & evaluating audit evidence, which is primarily derived from audit procedures carried out during the course of engagement. Since audit evidence obtained will be useful in reducing risk to an acceptable low level. So, such evidences obtained during the course of audit can be produced before the court. These evidences form part of auditors working which can be helpful in proving that he carries out audit efficiently to the extent possible.

2. Audit Documentation :- Audit working papers which also include excel files that auditor used to document client's key internal control, reporting, basis of his reporting, nature of business, as well as audit test's working papers. In general, the audit papers are maintained and prepared by audit staff or audit assistant. These dosuments can be viewed by auhorised persons or audit partners or audit managers. These working papers and documents contain the major performances or workings of the audit staff and auditors which acts as a great evidence in the law court.

3.Queries Raised by auditor & Responses submitted by management:- The queries which are raised by auditor during his course of audit and responses to those queries by management can be present in front of court. The affidavits obtained, in case of certain queries if not resolved, can also be produced.

4. He has to prove by giving references from "Standards on Auditing" that all required steps have been taken with due care and integration. He has to arrange his audit plan and audit procedures performed during the engagement.

             If audior is able to arrange the documents of his workings and external parties confirmations before the jury, he will not be held responsible for such loss happens to third party, otherwise he will be held responsible for negligence.