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And welcome to the session which would look any audit auditors responsibility for discovering a a legal fact in the prior session. We looked at the auditors responsibility for material error and fraud. What if there is responsibility for discovering material misstatement due to errors.
And so on good. Hello and welcome to this session in which we would look at the auditors responsibility for discovering illegal acts and the prior session. Looked at the auditor responsibility for finding errors and fraud and we what we said is the objective of the auditor is to provide reasonable within reasonable assurance that the financial statements are free from material errors and fraud from material misstatement.
Whether due to errors or fraud. Well when it comes to legal acts. Its the same so the responsibility for their manager is to provide reasonable assurance about a legal act and have to differentiate between a legal acts direct a legal acts that have a direct effect in a legal acts that have indirect effect.
Whats the difference between the two legal act has a direct effect that means they have a direct effect on the financial statements. They have a direct effect on the numbers listed on the financial statement. Such as well such as what taxes for example.
If the company manipulating committing fraud or errors. Or some illegal with some illegal payments or some illegal avoidance of tax of taxes. Thats an illegal act.
And it has a direct effect on the financial statement. Because youre going to have to deal with income tax expense any contacts liability also if theres any illegal acts when it comes to their pension. The pension.
The company will have a pension obligation or pension assets if they are committing a thing illegal within the pension account then its going to affect the financial statement. As well so if it has a direct effect on the financial statement. The responsibility for the auditor is the same thus to provide reasonable assurance.
That the financial statements are free of just reset errors and prod also in a sense illegal acts. Especially if they have a direct effect on the financial statement. Now also have illegal acts that they have indirect effect on the financial statement.
So what are those illegal acts well those illegal acts. They usually result in fines like environmental regulation. A violation or the federal employee safety regulation for example osha basically those stood they may become obsolete with president prom but especially the environmental regulation.
But thats not the case here so the auditor has no assurance that doesnt provide any assurance about indirect effect. They dont have effect on the financial statement. They might they might have a fact on some disclosure.
My might. But there is no effect on the financial statement. Now bear in mind we dont just ignore them im just differentiating between the the illegal act with a direct effect and the illegal act with the indirect effect.
Okay so why does the audit or responsibility audit procedures when non compliances and identify our suspect as lets assume the auditor find something find something what are they supposed to do well the odds or should obtain an understanding of the situation and discuss the matter with management at a level above those involved so they found something there when i go a level above. That responsibility and also they want to evaluate to see if this illegal act has any effect or potential effect. Possible effect on the financial statement.
So the auditor is expected to obtain at this point sufficient evidence regarding material amount that are directly affected by laws and regulation. Now we have to look at evidence we have to evaluate evidence okay laws such as those relating to taxes and pensions. Why because those they affect directly the financial statement have a direct effect on the financial statement on the amount as well as the disclosure in the financial statement.
Therefore any direct illegal act. Thats considered direct. Then the auditor will have to open their eyes.
And ask questions and probe. More okay also if you really think about it. If the auditor finds any illegal acts even it does even if its enough it doesnt have a direct effect on the financial statement.
Think about how the auditor is going to look at the company going forward. Well. Guess what theyre going to start to question the integrity okay theyre gonna rely less on what the company presents to them because if the company is committing anything illegal.
Although it may not have direct effect on the financial statement. Its going to make the company. A riskier company to audit.
Therefore. The risk assessment will go up. So what happen is the risk will go up.
Also the author will have to be more careful and the reliability on management presentation. Or management assertion will go down. Therefore.
The audit will have the auditor will have to put more time on different things to make sure that we are not giving anything that doesnt make any sense. Okay. Unless.
The matter is unsecured engines of the matter is not you know important the auditor if its important the auditor should communicate with those charged with governs of matter of non compliance. Usually youll go up as high as the board of directors. But itd be especially if the matter is important okay once again we also not once again we have to evaluate if we should report this violation to an outside regulatory agency.
Laquetta environmental environmental violation. Well do we have any responsibility to contact the environmental protection agency. Assume.
Its going to be there by the end of presidents from term. But again thats beside the point. But we have to also ask ourselves if we need to do anything like this now if theres an anthem of the non compliance.
Whatever that they are violating some federal law or regulation has material effect material effect on the financial statement and not adequately reflected in the financial statements. So now we find an illegal act and it has a maturity of the fact. But its not showing in the financial statement at this point.
We have to do two things we either qualify. The report. Well say its fairly presented except for this issue or an adverse opinion.
If the issue is severe its affecting the financial statement or the financial statement is not fairly presented well give an adverse opinion. Now of the audit is precluded by management. If we find it non compliance and management.
They are not giving us access to the evidence sir theyre basically do not do not be in cooperative. So were not being able to collect sufficient evidence sufficient appropriate evidence well we could either do one of two things either qualify. The report one of my means clearly presented.
Except that we could not get have access to to certain items okay or if its worse. We can disclaimer could just say we could not have access and because we could not have access. Were not going to take any responsibility for the financial statements.
We will disclaim so this is what we what would need to be happened with a legal act depending on the severity of the situation. How much its affecting the financial statements and whats the judgment of the auditor okay the next topic. Were going to look at is professional skepticism so the auditor will need to have professional skepticism.
And this will be its own separate recording to talk about the auditors professional skepticism. If you have any questions any comments by all mean email me or see me class study hard. .
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