chapter 7 audit & assurance

8/12/2019 Chapter 7 Audit & Assurance

1/30

CHAPTER 7 :AUDITING ISSUES AND LEGAL

LIABILITIES

GROUP 7

MOHAMAD ARIF B. HERJON 03DAT11F1072

MOHAMMAD IQKRAM B. MOHAMAD 03DAT11F1011

MUHAMAD IRSYADUDDIN B. ZAINUL ISMAIL 03DAT11F1070

KHAIRUL FAHMI B. MD SAYUTI 03DAT11F1149

LIM CHUN HOW 03DAT10F2196


2/30

O JECTIVE

Understand the nature of audit liabilities. Understand the audit legal liabilities.


3/30

DEFINE THE FRAUD

The terms fraud and irregularities are used to refer to :

1) Fraud which involves the use of deception to obtain anunjust or illegal financial advantage

2) Intentional misstatement in, or omissions of amounts ordisclosure from, an entitys accounting records orfinancial statements ; and

3) Theft


4/30

DEFINE THE ERROR

Error is used to refer to unintentional misstatements in, oromissions from an entitys accounting records or financialstatements.

Unintentional misstatements in the financial statement due toignorance or lack or knowledge of an employee and canalso be caused by weakness in internal control of anorganization that causes the financial statements providednot accurate. Usually this error could easily be detected.


5/30

DIFFERENTIATE BETWEEN FRAUD AND ERROR

No. Fraud Error

1. Usually been planned or

done intentionally.

Happen unintentionally and

no planned by theemployee.

2. Involving one person ormore than one person.

Involving only oneemployee.

3. Fraud done for personalgain.

The error that occurred doesnot give interest to anyparties.


6/30

DEFINE THE LEGAL LIABILITIES

Shareholders rely on the auditor to audit the financial statementsand as per the auditors report, the auditor is reporting to theshareholders.

However, when companies become public entities, the auditedfinancial statements become public documents and readersand users from all over the world are able to access the financialstatements, especially since most public listed companies maketheir audited financial statements available on their websites.


7/30

LEGAL ACTS THAT GOVERN

AUDITORS LIABILITIES

Legal acts thatgovern auditors

liabilities

Report to membersReport to

debentureholders

Report in the

prospectus


8/30

1) Report to members

According to section 174 of the Companies Act 1965, stateauditors duties should not be restricted by any agreementbetween the auditor to its shareholders or directors of the

company.

The liability is subject to the act and the law which means ifconvicted; the auditor may be fined or sentenced under theCode Act.


9/30

Companies Act 1965 requires auditors performing their duties

with regard to 2 aspect.

1. Prepare a report and give an opinion on these financialstatements and report should state the following :

a) Balance sheet and profit and loss account have beenproperly prepared in accordance with the requirements of theact and give a true and fair view.

b) The accounting records and other records are adequate andproperly kept as required by the act.

c) Directors report which states the matters contained in the

accounting records and accounting books give a true andfair view of the companys financial position and the reportshould be consistent with the knowledge of the auditor.


10/30

2. Auditors should state in his report when he is not satisfied aboutthe following :

a) If the auditor is difficult or does not get any information needed.

b) If the records are not kept properly.

c) If the information obtained from the branch is not adequate.

d) If the profit and loss statement is not consistent with theaccounting records.

e) If the balance sheet does not show the actual value of thecompany affairs.

f) If the director does not meet the reporting requirements of the

act and not in line with the auditors knowledge.


11/30

2) Report to debenture holders

Section 175 of the Company Act 1965, the auditors appointedby the financial institution has the responsibility to send a copyof the financial statements to each trustee for debentureholders of the company within a week of the statement wasissued.


12/30

3) Report in the prospectus

Section 46 of the Companies Act 1965 provides for civil liabilityfor the misstatements in prospectus.

It provides that an auditor, as an expert who authorises andcauses the issue of the prospectus is liable to pay compensationto persons who purchase shares or debenture on the faith of theprospectus for any loss sustained by reason of untrue statements.


13/30

TYPE OF LABILITIES

There are 2 types of auditors liability :

1) Liability under common law

o Client

o Third party

2) Criminal liability under statutes


14/30

1) Liability under common law

Liabilities under common law are known as general liability.

General liability based on general principles; if the auditors aregiven the task then he should be responsible to it.

Auditors negligence in carrying out these task will lead toauditors be liable, this means that the auditors is responsiblefor paying back the compensation of losses suffered due to

negligence of auditors in performing their duties.


15/30

Auditors negligence means :

- failed to use the skills/ knowledge/ experience as a professionalauditor.

- The auditor gives an appropriate report.

Two types of liability under common law :

a) Liability under the law of contract.

b) Liability to third partytort


16/30

a) Liability under the law of contracts (client)

There is a contractual relationship between the auditor and hisclient.

Under this contract it is implied that the auditor will carry out thework with reasonable degree of skill and care.

The degree of care and skill required will mainly depend on thenature of work undertaken.

Generally if the auditor has complied with ISA it is difficult toprove that he was negligence.

In the absence of suspicious circumstances the auditor will not

be liable for failing to uncover fraud and error which could notbe discovered by exercise of normal skill and care.


17/30

Examples of cases

Case 1 : Wilde & others VS Cape Dalgelish

- Failed to discover fraud caused by

cash.

Case 2 : Smith VS Sheard

- Failed to discover fraud because

there was no inspection made.


18/30

b) Liability to third partiesTort

An auditor may liable for negligence not onlyunder the law of contract but also in the law of

tort i.e if the person to whom he owed a duty ofcare has suffered financial loss as a result of theauditor negligence.


19/30

For the third party to succeed, he must prove thefollowing:

1. The auditor owed him a duty of care.

2. He has suffered financial loss resulting from the auditorsnegligence.

Tort means auditors responsibilities to third parties who donot have contract and this happen in the twocircumstances:

1. Bodily injury.

2. Financial losses.


20/30

Example of cases

Case 1 : Candler Christmas VS Crane & Co.

- Financial statements prepared

negligence by the auditor.

Case 2 : Ultramares corporation VS Touche & Co.

- Auditor negligent in carrying out its

responsibilities.


21/30

2) Criminal liability under the statute

Section 46 of the Companies Act provide that an auditor shallbe criminally liable if he willingly makes a material falsestatement in any report, certification or in the financialstatement with the intention to deceive and mislead.

Examples of criminal liabilities include :

1) The auditor accepts appointment when he is ineligible to doso or continue in office after becoming ineligible..

2) The auditor obtains the advantage of deception.

3) The auditor falsifies accounting records or documents.

4) When the publishes misleading statements intended todeceive member


22/30

Example of cases

Case 1 : United States VS Andersen

The government charged Andersen withdestruction of documents related to the firms

audit of Enron.


23/30

Factors that help to minimize the auditor

liabilities

1) Deal only with clients possessing integrity

o There is an increase likelihood of having legal problems when a

client lacks integrity in dealing with customers, employees, unitsof government and others

o A CA firm needs procedures to evaluate the integrity of clientsand should dissociate it self from clients found lacking.


24/30

2) Hire qualified personnel and train and supervise themproperly

a considerable portion of the most audits is done by youngprofessionals with relatively little experience.

Given the high degree of risk CA firms have in doing audits, it isimportant that these young professionals is also essential.

3) Follow the standards of the profession

a firm must implement procedures to ensure that all firmmembers understand and follow the auditing standard.


25/30

4) Maintain independence

Independence in fact requires an attitude of responsibilityseparate from clients interest.

Much litigation has arisen from a too-willing acceptance byan auditor of a clients representation or of a clientspressures.

The auditor must maintain an attitude of healthy skepticism.

5) Understand the clients business

the lack of knowledge of industry practices and clients

operations has been a major factor in auditors failing touncover misstatements in several cases.

It is important that the audit team be educated in theseareas.


26/30

6) Perform quality audit

Quality audits require that auditors obtain appropriate evidenceand make appropriate judgements about the evidence.

Improved auditing reduces the likelihood of misstatements andthe likelihood of lawsuits.

7) The document work properly

The preparation of good audit documentation helps the auditororganise and perform quality audits.

Quality audit documentation is essential if an auditor has todefend an audit in court.


27/30

8) Obtain an engagement letter and a representation letter

These 2 letters are essential in defining the respective obligationsof the client and the auditor.

There are helpful especially in lawsuits between the client andauditor, and also in third party lawsuits.

9) Maintain confidential relations

o Auditors are under and ethical and sometimes legal obligationnot to disclose client matters to outsiders.


28/30

10) Carry adequate insurance

it is essential for a CA firm to have adequate insuranceprotection in the even lawsuits.

Although insurance rates have been risen considerably as aresult of increasing litigation, professional liability insurance is still

available for all CAs.

11) Seek legal counsel

When serious problems occur during an audit, a CA would be

wise to consult experienced counsel. In the event of a potential or actual lawsuit, the auditor should

immediately seek an experienced attorney.


29/30

12) Exercise professional skepticism

Auditors are often liable when they are presented withinformation indicating a problem that they fail to recognise.

Auditors need to strive to maintain a healthy level of skepticism,one that keeps them alert to potential misstatements, so that

they can recognise misstatement when they exist.


30/30

THANK YOU.

chapter 7 audit & assurance

Documents