CHAPTER 7 AUDIT ISSUES AND LEGAL LIABILITIES

Give the definition of audit liability.

• A major part of audit works for both internal and external audits. A good audit planning will help the auditor to minimize its risks, improve audit efficiency, and meet its objective at the minimum effort.

• Fraud or a material error might not be discovered during the time of audit. This oversight might lead to legal actions being taken by those who claim to or actually do rely on the work of the auditor.

• Refers to information or data that use or collect by auditors as part of their audit works so that they could conclude their opinion on whether or not financial statements are prepared in all material respect and in accordance with the applicable financial reporting frameworks.

• The risk that financial statements are materially incorrect, even though the audit opinion states that the financial reports are free of any material misstatements.

What are the aspect of nature of fraud?

• Gives a client a written audit report.

• Fails to follow generally accepted auditing standards.

• Illegal acts under statutory law.

• Occurs intentionally.

What are the aspect of cause of error?

• To do the job correctly and discover all irregularities.

• Happen due to a lack of skill or knowledge.

• To act as a professional and not commit fraud.

• To exercise the skill and care of the ordinarily prudent accountant in the same circumstances.

Who is the person involved in fraud?

• Trust, trustworthiness and the going concern opinion.

• A complot by the management or the organization.

• Third parties as conduits of trust.

There are parties that are considered agents except...

• Audit firm staff

• Auditor of another firm who performed part of a different audit work

• Experts who are engage to supply their technical service

• Board of directors

Types of liabilities is...

• Common Law & Statutory Law

• Business Law & Common Law

• Company Law & Statutory Law

• Company Law & Business Law

Liability under common law:

i. Breach of contract.

ii. Negligence.

iii. Gross negligence.

iv. Fraud.

• TRUE

• FALSE

The auditor has the right to defense by proving 4 aspect:

i. Unstated role in the contract.

ii. Auditor's action is not negligence.

iii. Negligence was due to or caused by the client.

iv. Causality relationship.

• TRUE

• FALSE

There are 4 aspect of differences between fraud and error:

i. Nature

ii. Cause

iii. Person involved

iv. Level of complexity

• TRUE

• FALSE

Parties who bring a case against an auditor to court must prove 3 things:

i. The auditor's liability cause by his/her own action.

ii. Negligence on the part of the auditor resulting in a loss.

iii. The amount of the loss (measurable).

• TRUE

• FALSE