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1. Describe the responsibility of the management and the auditor with respect to audit
of financial statements.
First of all Internal auditors are company employees, while external auditors
work for an outside audit firm.
Internal audit reports are used by management, while external audit reports are
used by stakeholders, such as investors, creditors, and lenders.
Internal auditors can be used to provide advice and other consulting assistance
to employees, while external auditors are constrained from supporting an audit
client too closely.
Internal auditors will examine issues related to company business practices and
risks, while external auditors examine the financial records and issue an opinion
regarding the financial statements of the company.
Internal audits are conducted throughout the year, while external auditors
conduct a single annual audit. If a client publicly held, external auditors will also
provide review services three times per year.
3. What typical allegations would result to lawsuits filed by clients against auditors?
A. Lawsuits against auditors typically involve alleged misstatements which are usually:
an improper or inadequate disclosure
an inappropriate valuation
B. the auditor did not discover an employee defalcation.
C. The auditor did not complete the audit on the agreed date.
D. Inappropriate withdrawal from an audit.
4. Give and discuss at least 2 defenses of an auditor against client suits.
Lack of duty to perform – they can claim that there was no implied or expressed
contact to perform the service. So which is why engagements letters are
important its your contract so they will say that they did not have a duty to
perform that based on the contract they started the engagement letter we laid
what our responsibilities are would be and what your responsibilities aren’t and
we had no duty to perform that.
Due reasonable care –the auditor was performed using reasonable care or the
lack of reasonable care did not cause damages
5. Give and discuss at least 2 defenses of an auditor in lawsuits filed by intended users of
financial statements.
Absence of causal connection –So the loss was caused by other factors not the
financial statements. And the third party must be able to prove that there is a
close causal connection between the auditor’s breach of the standard of due
care and the damages suffered by the third party.
Non negligent performance - so what the auditor is saying that we did our job
accordance with generally accepted auditing standards although we don’t
provide absolute assurance but we provide a reasonable assurance and based on
the work that we did and the evidence that we collected we did our job
accordance with generally accepted auditing standards, we exercised in good
faith, and due diligence
6. In your personal view, is carefully choosing clients a good shield in order to minimize
exposure to legal liability? If not, what best action/s would you take in order to
balance risks and that your earning potential will not be compromised?
When it comes to audit quality at accounting firms, there's always room for improvement.
While accountants have it in their bloodstream to be meticulous and cover all needed tasks of
a project with the utmost quality, there still needs to be an avoidance of hitting a plateau.
While having an accountant liability policy in place to protect against these claims, it's even
more important to practice diligence and avoid stale operating procedures.