Financial Reports Paper Example

Negligence cannot be qualified without a reckless disregard for the truth. Although the defendants were aware of the mail policy, they did not know the fraud made by Nay through the mail. Auditing standards The above described cases are related to auditor’s responsibility to assess risk of material misstatement in the financial statements of a firm that may lead to fraud. ASA 240 the Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Reports This standard describes that, it is the responsibility of the auditor to judge the fraud in an audit in the financial reports.

This standard applies to the case of Rusch Factors, Inc. v. Levin (1986). The auditors should maintain a professional attitude and recognize that materials misstatements in financial reports of the company may exist. The auditor must perform the required procedures to find information that can be used to identify the risks of material misstatement due to fraud. The auditor must identify and evaluate risks of material misstatement arising from fraud at both the financial and the declaration level. Auditors must ensure that the firm’s internal controls are in place and implemented.

The auditor of a firm’s financial reports should be committed in designing and performing audit procedures in order to deal with the assessed risks of material misstatement due to fraud (Stewart et al 2007, p. 53). ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement The standard ASA 315 provides that auditors must practice professional competence and due care. It requires any person providing forensic services to maintain professional competence and ensure due care in the performance of their work.

Auditors must have the required specialized training and experience before accepting any audit engagement to provide a forensic accounting service to a company. According to Dye (1993, p. 889), a company should apply professional judgment in the determination of whether the auditor is competent enough to provide a forensic accounting service. The auditor must perform risk assessment procedures that enable him to understand the entity and its environment including the internal control. The auditors in the case of Harold Tod Parrott v.

coopers & Lybrand, LLP must have made enquiries with the management to get information that is helpful in identifying the risks of material misstatement due to fraud. The auditors should have used professional expertise to seek advice from a third party to establish the basis of preparing the valuation report. ASA 330 the Auditor’s Procedures in Response to Assessed Risks Auditors are required to determine generally responses that can be used to address risks arising from material misstatement due to fraud at the financial report level. The auditors in the case of Ultramares Corporation v.

Touche (1931) were responsible for designing and performing audit procedures that would be able to respond to assessed risks arising from material misstatement at the declaration level. Auditors must be aware of the timing, nature and extend of further audit procedures that are required in the assessment of risks of the firm. They must identify areas where tests of control or substantive procedures are required. This will enable auditors to be able to determine the adequacy of presentation and disclosure by evaluating the completeness and appropriateness of the audit evidence acquired (Grobstein et al 1984, p. 11). Conclusions

Auditors are said to be liable to third parties in cases of ordinary and gross negligence and the party suffers damages. Auditors must act with due care and diligence to avoid breach of duty that may lead third parties to incur losses. Parties that can recover from ordinary negligence are third party beneficiaries, limited class of known or intended users and any third party whom the auditor may foresee as user. In order for an auditor to be liable for negligence, the plaintiff must prove that he or she suffered a loss due to auditor’s negligence. The plaintiff must have relied on the financial reports that led to incurrence of loss.

In order to prevent litigation, auditors are required to emphasize on complying with GAAS and professional ethics. Auditors must maintain sufficient professional liability as well as examining potential clients carefully. They must have a complete knowledge of clients business and cautiously assess any risk mistakes and abnormalities together with the ones specified by weak areas in internal control. Bibliography Biggs, SF & Mock, TJ 1983, ‘An Investigation of Auditor Decision Processes in the Evaluation of Internal Controls and Audit Scope Decisions’, Journal of Accounting Research, Spring Vol. 2, pp. 235-255.

Coopers & Lybrand 1979, ‘Theoretical Issues and Practical Methods of Auditing Solicitors’ Trust Accounts’ Consultants Report to the N. S. W. Law Reform Commission. Cushing, BE & Loebbecke, JK 1983, ‘Analytical approaches to audit risk: A survey and analysis’, Auditing: A Journal of Practice and Theory, Fall, pp. 23- 41. Dye, RA 1993, ‘Auditing Standards, Legal Liability, and Auditor Wealth, The Journal of Political Economy, university of Chicago press, Vol. 101, No. 5, pp. 887-914. Grobstein, M & Craig, PW 1984, ‘A Risk Analysis Approach to Auditing’, Auditing: A Journal of Practice and Theory, Spring, Vol. 3, No. 2, pp.

1-16. Holstrum, GM & Mock, TJ 1985, ‘Audit Judgement and Evidence Evaluation’, Auditing: A Journal of Practice and Theory, Fall, Vol. 5, No. 1, pp. 101-108. Toba, Y 1975, ‘A General Theory of Evidence as the Conceptual Foundation in Auditing Theory’, The Accounting Review, pp. 7-24. Tubbs, RM, Messier, WF & Knechel, WR 1990, ‘Decency effects in the auditor’s belief revision process’, The Accounting Review , April, 452-460. Waller, WS & Felix, WL 1984, ‘Cognition and the Auditor’s Opinion Formulation Process; A Schematic of Interactions between Memory and Current Audit Evidence’, Norman ton: University of Oklahoma Press.

Stewart J & Munro, L 2007, ‘The Impact of Audit Committee Existence and Audit Committee Meeting Frequency on the External Audit: Perceptions of Australian Auditors’, International Journal of Auditing, pp. 51-69. Taylor, MH 2000, ‘The Effects of Industry Specialization on Auditors’ Inherent Risk Assessments and Confidence Judgments’, Contemporary Accounting Research, Vol. 17, No. 4, pp. 693–712. Tuttle, B, Coller, M & Plumlee, RD 2002. ‘The Effect of Misstatements on Decisions of Financial Statement Users: An Experimental Investigation of Auditor Materiality Thresholds’, Auditing: A Journal of Practice and Theory, Vol. 3. No. 4, pp. 37-48.