AFM351 Lecture Notes - Lecture 3: Audit Risk
28 Jun 2018
School
Department
Course
Professor
Why auditors get targeted for lawsuits?
•
The auditors' legal environment
Did the auditor exercise due care in performing the audit?
○
Audit failure
occurs when the auditor issues an inappropriate audit opinion as the result of an
underlying failure to comply with the requirements of generally accepted auditing standards
(GAAS)
•
Difficult to determine who has the right to expect the benefit of an audit and recover losses
in case of failure
○
It is difficult to determine when the auditor has failed to use
due care
-
completing the audit with
care, diligence, and skill
•
Business failure
occurs when a business is unable to repay its lenders or meet the expectations of
its investors because of economic or business conditions such as recession, poor management
decisions, or unexpected competition in the industry
•
It is common for users to claim there was an audit failure when a business goes bankrupt when
the most recently issues auditor's opinion indicates that the financial statements were fairly
stated
•
Unavoidable because auditors gather evidence on a test basis and well concealed
frauds are difficult to detect
Did not detect fraud doesn’t mean that there was audit failure
Audit risk
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the risk that the auditor will conclude that the F/S are fairly stated and un
unqualified opinion can therefore be issued when, in fact, they are materially misstated.
○
So how can auditor issue an inappropriate opinion when the audit was conducted appropriately
(according to GAAS)?
•
Expectations gap
= the gap between the public expectations of the auditor's role and
responsibilities and the auditor's responsibilities per GAAS.
•
Auditor litigation and the expectations gap
Notes
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chapter 3
May 5, 2018 11:53 AM
AFM 351 Page 1
Document Summary
Audit failure occurs when the auditor issues an inappropriate audit opinion as the result of an underlying failure to comply with the requirements of generally accepted auditing standards (gaas) It is difficult to determine when the auditor has failed to use due care - completing the audit with care, diligence, and skill. Difficult to determine who has the right to expect the benefit of an audit and recover losses in case of failure. Business failure occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions such as recession, poor management decisions, or unexpected competition in the industry. It is common for users to claim there was an audit failure when a business goes bankrupt when the most recently issues auditor"s opinion indicates that the financial statements were fairly stated.
