Auditors Responsibilities PDF

Audit Theory and Practice 2 Auditors’ responsibilities Prepared by Taing Muykeang The statutory duties of Directors To report on the truth and fairness of financial statements To ensure the company...

Audit Theory and Practice 2 Auditors’ responsibilities Prepared by Taing Muykeang The statutory duties of Directors To report on the truth and fairness of financial statements To ensure the company has kept adequate accounting records To ensure the underlying records match the financial statements To ensure each branch of the business has given sufficient information to the auditor To ensure a statement of directors’ responsibilities is consistent with the financial statements To ensure the directors’ report is consistent with financial statements Statement of directors’ responsibilities As part of the report which they put together to accompany the financial statements, the directors of a company should include a statement of directors’ responsibility. The directors of a company are responsible for preparing the financial statements, and they disclose this responsibility in the annual report. The directors may NOT delegate this responsibility to any other party. If the directors do not include or disclose their responsibilities in their annual report, the auditors should include it in the auditor’s report. Note: The auditor are NOT responsible for preparing the financial statements of a company. Fraud and Error The responsibility for the prevention and detection of fraud lies with the directors of a company, not with the external auditors. Fraud is an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Error is an unintentional misstatement in the financial statements, including the omission of an amount or a disclosure. Note: Fraud and Error, say in recording original transactions when they happen, may result in the financial statements not giving a true and fair view. Contract law The company and auditors agree on the express terms of the contract which are set out in an engagement letter. These are the terms which are actually stated within the contract. Responsibility of management for the preparation and fair presentation of the financial statements. Responsibility of management to provide auditors with access to all information relevant to the preparation of the financial statements. Responsibility of management to provide auditors with access to staff within the entity from whom the auditors determine it necessary to obtain audit evidence. Note: For a successful negligence claim against the auditors, there must be a duty of care, negligence and monetary loss suffered. 1. Implied term: Law states that there are certain terms which always exist in a contract between the audit firm and the company: The auditors have a duty to exercise reasonable care ○ Auditors should use generally accepted auditing technique/standard ○ If auditors’ suspicious are aroused, they must carry out investigations until they are satisfied ○ Auditors must act honestly and carefully when making judgement The auditors have a duty to carry out the work required with reasonable expediency (the work would be generally regarded as being appropriate in the circumstances) The auditors have a right to reasonable remuneration 2. Negligence: ❖ If the auditors breach the terms if their contract the company will have claim against them for damages. ❖ If the auditors breach their implied duty of care under the contract, the company may be able to sue them for negligence. THREE things must exist for the company to bring successful claim: Duty of care: There existed a duty of cate enforceable at law. Negligence: In a situation where a duty of care existed, the auditors were negligent in the performance of their duty, judged by the accepted professional standards of the day. Damages: The client has suffered some monetary loss as a direct consequence of the negligence on the part of the auditors. Third parties and negligence ❖ If the auditors have been negligent, it is possible that a third party may also have a claim against the auditors even though they do not have a contract with them. The THREE requirements for a third party negligence claim are the same as they are for the company: Duty of care: There existed a duty of care enforceable at law. Negligence: In a situation where a duty of care existed, the auditors were negligent in the performance of that duty, judged by the accepted professional standards of the day. Damaged: The client has suffered some monetary loss as a direct consequence of the negligence on the part of the auditors. Third parties and negligence As a general rule, it seems that judges do not consider that auditors owe third parties a duty of care, it is only in exceptional circumstances that such a duty arises. The exceptional circumstances which judges have referred to are when an auditor knows that a third party is relying on the audited financial statements. For example, if the directors of the company tells the auditor that the bank will rely on the audited financial statements. NOTE: The auditors is entitled to try to disclaim liability to those people by writing to them and stating that the auditor’s report is only for the purpose of the shareholders and that they do not admit legal liability to anyone else. End of Chapter 2! More to go!!