Question

1. List five defense that audit firms may use to defend themselves against shareholder lawsuits, explain any three of these defenses

Answer 1

1. Time constraint,
2. Provides reasonable assurance but not conclusive,
3. Involves judgement,
4. Inherent limitations of auditing,
5. Not in the nature of investigation.

Time constraint: As you know auditing is usually done at the end of the year where all the transactions of the entire year will be checked in 2 or 3 months, verifying all the 12 months transactions in just 2 to 3 months. Therefore time constraint stands as a defence against share holders.

Provides reasonable assurance: Auditing does not provide any conclusive evidence in its opinion. Auditors opinion provides only a reasonable assurance to the shareholders on the true and fair view of the financial statements of the company. It is nowhere mentioned that the auditor opinion is conclusive.

Not in the nature of investigation: Investigation which usually takes years long to identify all the frauds that may be involved in the company, one should not expect auditor to identify all those in a span of 2 to 3 months which is impractical and impossible.

Also note that, auditor should however support his opinion with a valid audit documentation and audit evidence, that is there should be a valid support as to the auditor opinion.