AU Section 317 Case Study
February 14, 2011 Neckuscha L.M. Caputo
Illegal Acts by Clients: AU Section 317 (SAS no. 54)
An auditor has two distinct responsibilities regarding illegal acts. First, an auditor must thoroughly understand all existing accepted auditing standards to be equipped to recognize the potential for illegal acts. Once an auditor has uncovered the potential for such violations then it is equally prudent to understand the personal responsibilities an auditor must bear and the necessary actions that accompany an irregular audit.
The government has well intentioned regulations enacted to protect individuals and organizations from an action or an omission that violates or influences the material reliability of a financial statement or audit. Illegal acts committed by clients must segregate activities that do not include the entity that is having their financial statements audited. Equally, illegal acts also include the acts of management or individuals that act in the interest of the aforementioned entity.
Although the responsibility to recognize illegal acts is important to the auditor, it is not the burden of an independent auditor to determine culpability or render judgment. Again, an auditor is likely the most qualified individual to …show more content…
recognize something unconventional due to their intimate understanding of their own client and experience in that particular industry. With that being said, it is the ultimate responsibility of a qualified lawyer or the appropriate court of law to determine if such findings are in fact illegal acts and punishable by law.
Illegal acts can be well concealed if they are associated with activities that stray from the norm of financial statements.
An auditor would be less likely to discover an activity that would generally not find its way onto a financial statement in the first place. An auditor also understands the laws associated with financial statements in the context of the intention of a particular audit. Illegal acts are generally not discovered solely on the basis of their lawfulness. Perceived illegal acts that happen outside the financial and accounting activities of a company can have substantial influence on an audit but are generally left undisclosed unless a forthcoming client or government investigation reveals potential
evidence.
Whether the perception of possible illegal acts is directly relevant to financial statements or not, there is a particular responsibility that an auditor has to disclose their findings. However, it is understood that an auditor may not discover the potential for an illegal act because the purpose of their audit and the specificity of the information gathered may not allow for the revelation of any indiscretion. Additionally, an audit that is performed to satisfy all generally accepted auditing standards may never disclose a potential illegal act. Therefore, the detection of illegal acts is never guaranteed and the liability associated with them cannot necessarily be placed on the auditor.
The process of an audit can unearth the possibility of illegal acts due to the procedures associated with conducting an audit. An auditor will become intimately acquainted with an organization through thorough analysis of transactions, the reading of minutes and several other activities that can provide helpful insight. Furthermore, an auditor will examine the policies and procedures that help ensure a client’s compliance with laws and regulation.
There are several red flags that an auditor may come across. Every aspect of a transaction can and should be scrutinized. For example, payments made to government entities or large cash purchases, excessive commissions for sales reps that are disproportionate to normal fees paid. With any of these alleged illegal acts, an auditor is responsible to understand the nature of the violation and its ultimate effects on a financial statement. Additionally, an auditor should solicit the involvement of management above the level of the perceived infraction. If management does not feel compelled to cooperate then the auditor should consult the client’s legal counsel and simultaneously continue to gather information. Finally, the revelation of an illegal act will likely mean that there will be additional implications for the ultimate accuracy of the audit.
The auditor that suspects an illegal act and discovers that it can have consequences on the financial statements should conclude that there are irregularities that simply cannot ensure precision. The auditor should share their expertise in proclaiming how significant or far-reaching an illegal act can be in its effects on a financial statement.
In the case of an auditor being refused access to material relevant to such findings, the auditor should simply cease activity and not offer an opinion on the financial statements. If the client refuses to accept the findings of the auditor due to the aforementioned irregularities, then it is proper protocol for the auditor to professionally withdraw from any involvement with the client and express the precise reasons in a written statement for the individual charged with authority in this matter. Finally, if the auditor is unable to determine the presence of an illegal act due to external forces outside of the client, then it is appropriate to disclose this and quantify the potential effects of this in the final report.
Finally, it goes outside the general responsibilities of an auditor to notify parties outside of management or the parties of governance about an illegal act. However, an auditor should notify relevant parties in certain circumstances. For example, an auditor change should obviously involve a successor when a transition takes place. A subpoena would also legally obligate an auditor to disclose an illegal act along with any agency that receives financial assistance from the government.
Only when a set of special circumstances is applied, is an auditor to go beyond these basic responsibilities. There are instances that an auditor will have specific instructions to detect compliance and regulations. In these cases, the auditor may act upon pre-arranged procedures agreed upon before the audit is set to begin.
Illegal Acts by Clients: AU Section 317 (SAS no. 54)
An auditor has two distinct responsibilities regarding illegal acts. First, an auditor must thoroughly understand all existing accepted auditing standards to be equipped to recognize the potential for illegal acts. Once an auditor has uncovered the potential for such violations then it is equally prudent to understand the personal responsibilities an auditor must bear and the necessary actions that accompany an irregular audit.
The government has well intentioned regulations enacted to protect individuals and organizations from an action or an omission that violates or influences the material reliability of a financial statement or audit. Illegal acts committed by clients must segregate activities that do not include the entity that is having their financial statements audited. Equally, illegal acts also include the acts of management or individuals that act in the interest of the aforementioned entity.
Although the responsibility to recognize illegal acts is important to the auditor, it is not the burden of an independent auditor to determine culpability or render judgment. Again, an auditor is likely the most qualified individual to …show more content…
recognize something unconventional due to their intimate understanding of their own client and experience in that particular industry. With that being said, it is the ultimate responsibility of a qualified lawyer or the appropriate court of law to determine if such findings are in fact illegal acts and punishable by law.
Illegal acts can be well concealed if they are associated with activities that stray from the norm of financial statements.
An auditor would be less likely to discover an activity that would generally not find its way onto a financial statement in the first place. An auditor also understands the laws associated with financial statements in the context of the intention of a particular audit. Illegal acts are generally not discovered solely on the basis of their lawfulness. Perceived illegal acts that happen outside the financial and accounting activities of a company can have substantial influence on an audit but are generally left undisclosed unless a forthcoming client or government investigation reveals potential
evidence.
Whether the perception of possible illegal acts is directly relevant to financial statements or not, there is a particular responsibility that an auditor has to disclose their findings. However, it is understood that an auditor may not discover the potential for an illegal act because the purpose of their audit and the specificity of the information gathered may not allow for the revelation of any indiscretion. Additionally, an audit that is performed to satisfy all generally accepted auditing standards may never disclose a potential illegal act. Therefore, the detection of illegal acts is never guaranteed and the liability associated with them cannot necessarily be placed on the auditor.
The process of an audit can unearth the possibility of illegal acts due to the procedures associated with conducting an audit. An auditor will become intimately acquainted with an organization through thorough analysis of transactions, the reading of minutes and several other activities that can provide helpful insight. Furthermore, an auditor will examine the policies and procedures that help ensure a client’s compliance with laws and regulation.
There are several red flags that an auditor may come across. Every aspect of a transaction can and should be scrutinized. For example, payments made to government entities or large cash purchases, excessive commissions for sales reps that are disproportionate to normal fees paid. With any of these alleged illegal acts, an auditor is responsible to understand the nature of the violation and its ultimate effects on a financial statement. Additionally, an auditor should solicit the involvement of management above the level of the perceived infraction. If management does not feel compelled to cooperate then the auditor should consult the client’s legal counsel and simultaneously continue to gather information. Finally, the revelation of an illegal act will likely mean that there will be additional implications for the ultimate accuracy of the audit.
The auditor that suspects an illegal act and discovers that it can have consequences on the financial statements should conclude that there are irregularities that simply cannot ensure precision. The auditor should share their expertise in proclaiming how significant or far-reaching an illegal act can be in its effects on a financial statement.
In the case of an auditor being refused access to material relevant to such findings, the auditor should simply cease activity and not offer an opinion on the financial statements. If the client refuses to accept the findings of the auditor due to the aforementioned irregularities, then it is proper protocol for the auditor to professionally withdraw from any involvement with the client and express the precise reasons in a written statement for the individual charged with authority in this matter. Finally, if the auditor is unable to determine the presence of an illegal act due to external forces outside of the client, then it is appropriate to disclose this and quantify the potential effects of this in the final report.
Finally, it goes outside the general responsibilities of an auditor to notify parties outside of management or the parties of governance about an illegal act. However, an auditor should notify relevant parties in certain circumstances. For example, an auditor change should obviously involve a successor when a transition takes place. A subpoena would also legally obligate an auditor to disclose an illegal act along with any agency that receives financial assistance from the government.
Only when a set of special circumstances is applied, is an auditor to go beyond these basic responsibilities. There are instances that an auditor will have specific instructions to detect compliance and regulations. In these cases, the auditor may act upon pre-arranged procedures agreed upon before the audit is set to begin.