Chapter 7 : Audit Issues & Legal Liabilities
GROUP 7
1.Sri Sahirah Binti Sahadom (10DAT18F1502)
2.Nur Zulaikha Binti Mohd Azhar (10DAT18F2017)
3.Nur Jazilah binti Mohamed jawathu (10DAT18F2021)
4.Nur Rabiatul Adawiyah Binti Mohamed Shahar (10DAT18F2051)
5.Muhammad Syahilman Bin Sharaizhi (10DAT18F2068)
Auditing Issues and Legal Liabilities Introduction
(1) Understanding the meaning of fraud and error.
(2) Reviewing the legal acts that govern auditor's liabilities.
(3) Relation between type of liabilities and current audit cases.
Audit Liabilities
The legal liability that is assumed when the auditor is performing professional duties.
(A) The auditor is liable for client accounting misstatements in the financial statements.
(B) There is always the risk of fraud and material misstatement in financial statements.
(C) Fraud in audits is when an entity is found to have illegally altered financial statements to manipulate its financial health or to hide profit or losses. It is severely punished since fraud undermines the trust that is the bedrock of the global financial system.
Fraud and Error
- Inadvertently taking an expense to the wrong account: For example, an advertising expense shows up as an amortization expense. The two accounts are next to each other in the chart of accounts, and the data entry clerk made a simple keying error.
- Booking an unreasonable accounting estimate for allowance for bad debt expense: The person who made this mistake may have simply misinterpreted the facts. The allowance for bad debt arises because generally accepted accounting principles call for the matching of revenue and expenses for the same financial reporting period. Each period, a certain amount of credit sales have to be recorded as bad debt. That way, revenue isn’t overstated in the current period.
- Incorrectly applying accounting principles: Recording assets at their cost rather than their market value is an example of an accounting principle. Make sure the company hasn’t inadvertently made an adjustment to increase the value of assets (such as land or buildings) to their appraised value rather than cost. It’s never appropriate to change the value of a fixed asset on the balance sheet from its original cost.
Legal Liabilities
There are two pieces of civil law of particular significance to the audit profession; contract law and the law of tort. These establish the principles for auditor liability to clients and to third parties, respectively. Under contract law parties can seek remedy for a breach of contractual obligations.
- An agreement between private parties creating mutual obligations enforceable by law. The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.
- A tort, in common law jurisdiction, is a civil wrong (other than breach of contract) that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. It can include intentional infliction of emotional distress, negligence, financial losses, injuries, invasion of privacy, and many other things.
Types of Liabilities and Current Liabilities
- Liability to Clients
An auditor is in a contractual relationship with a client. If the auditor does not
perform his or her side of the bargain according to contract terms the client can sue for
breach of contract. A client may seek these remedies for breach of contract:
(1) specific performance;
(2) general monetary damages for losses incurred as a result of the breach;
(3) consequential damages that occur indirectly as a result of the breach.
- Liability to Third Party
Auditors may be liable for negligence to third parties such as actual and potential shareholders, vendors, bankers. Under the common law, auditor can be held liable to client for breach of contract, negligence and fraud; and auditor can be held liable to third party for negligence and fraud.
- Fraud / Forensic
A forensic audit examines and evaluates a firm's or individual's financial records to derive evidence used in a court of law or legal proceeding. Forensic auditing is a specialization within accounting, and most large accounting firms have a forensic auditing department. Forensic audits require accounting and auditing procedures and expert knowledge about the legal framework of such an audit.
Factors That Help to Minimize the Auditor Liabilities
1.Get rid of high risk clients and troublemakers. Continuing to serve clients that are risky, that require constant hand-holding, that are uncooperative or that argue over fees limits productivity of CPA firm personnel and often creates a “crisis-oriented” culture.
2.Make sure in-charge accountants and engagement leaders know what they are doing. Due to employee turnover, business growth or other reasons, staff personnel are frequently promoted to these leadership positions without adequate experience and training.
3.Carefully manage cookie-cutter approaches to audits. Standard approaches to attest engagements without carefully considering the facts and circumstances of each can increase the possibility errors or fraud going undetected.
4.Restrict the use of reports in high risk circumstances. Normally, restrictions on the use of reports are appropriate when the accountant or auditor has concern about unqualified or unauthorised persons utilising financial statements and footnotes.
5.Compliance on Audit quality: There are a number of ways in which audit firms can manage their exposure to claims of negligence. Perhaps the most obvious is not being negligent in the first place.
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Question for group
1. Define the fraud
2. Differentiate between fraud and error.
3. Define the legal liability
4. Discuss Liability to client
5. Discuss Liability to third party
6. Discuss Fraud / Forensic
8. Give the factors that minimize the auditor liabilities
Comments
- Liability to Clients
An auditor is in a contractual relationship with a client. If the auditor does not
perform his or her side of the bargain according to contract terms the client can sue for
breach of contract. A client may seek these remedies for breach of contract:
(1) specific performance;
(2) general monetary damages for losses incurred as a result of the breach;
(3) consequential damages that occur indirectly as a result of the breach
Factor that minimize the auditor's liabilities :
-Standard and group setting
-Oppose lawsuit
-Education of user
-Tailor engagement practice aids to meet the needs of clients
-Section members for improper conduct and performance
-Engagement leaders should deliver and discuss engagement letter
Define fraud
According to ISA 240 “The fraud refers to intentional misrepresentations regarding financial information by one or more individuals among management, employees or third parties.
When an entity is found to have illegally altered financial statements to manipulate its financial health or to hide profit or losses. It is severely punished since fraud undermines the trust that is the bedrock of the global financial system
Auditors may be liable for negligence to third parties such as actual and potential shareholders, vendors, bankers. Under the common law, auditor can be held liable to client for breach of contract, negligence and fraud; and auditor can be held liable to third party for negligence and fraud.
Legal liability defines as an agreement between private parties creating mutual obligations enforceable by law. The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.