Auditing Questions and Answers

Posted: August 26th, 2021

Auditing Questions and Answers

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Auditing Questions and Answers

Question 1: Sources of Auditor Liability

            There are four main sources of auditor liability. The first source is a liability to clients under contract law. In this case, auditor liability emanates from the auditor’s inability to fulfill his or her obligations under the contract binding him to the client thereby causing the client to incur losses (James, 2016). As such, there is a need to prove the causal relationship between the auditor’s negligence and the client’s loss. The second one is the auditor’s liability to the third party under common law. It results from the auditor’s failure to perform for third parties. The source of liability is usually exacerbated by the fact that in all the states, no formal contract usually exists between the auditor and the third parties. As such, the obligation to perform in such scenarios is normally controlled by the existing state laws which tend to vary from one state to another. 

            Liability to the third party under the federal securities laws is the third source. According to the Securities Act of 1933 and the Securities Exchange Act of 1934, an auditor’s liability covers only up to the purchasers of publicly listed stock (Keller, 2018). Therefore, these federal laws provide strict liability standards on auditors as they do not cover third parties- the likes of which include creditors and labor unions. The fourth source is criminal liability. In this case, auditors can be charged with crimes under the various state and federal laws for any fraudulent activity that they engage in (Reinstein, Churyk&Tate, 2018). As such, the existing federal laws make it a criminal offense for auditors to knowingly defraud firms and individuals through the presentation of false financial statements. Thus, the auditors risk facing tough jail terms or hefty fines should they be found culpable of these criminal activities.

Question 7: Audit Objectives

            Normally, auditors make use of management assertions as a guide as regards what they need to look for to certify that a given business’ financial statements are accurately and fairly stated. To auditors, these management assertions formulate the audit objectives that aid in guiding their audit work. There are 18 audit objectives in total which are in turn categorized into three main groups. These are transaction-related audit objectives, balance-related audit objectives, and presentation and disclosure audit objectives. Transaction-related audit objectives refer to the transactions that the auditee records in its journals. They include occurrence, completeness, accuracy, classification, timing, and summarization (Keller, 2018). For example, the accuracy objective demands that all the transaction recorded in an auditee’s journals to be accurate and complete. In the same breath, the timing objective requires that all the transactions are recorded for the right accounting period.

            Balance-related audit objectives are usually applied to test the general ledger account balances. Here, auditors can test a customer’s account balance by directly confirming it with the customer, and then bypassing the testing of all the transactions that resulted in customer results under consideration. Balance related audit objectives are numerous and they include existence, completeness, accuracy, cutoff, detail tie-in, and realizable value. The realizable value objective, for instance, addresses concerns on if the assets audited are worth the value shown in the firm’s financial statements. Lastly, presentation and disclosure audit objectives usually address matters to do with financial statements. That is, ensuring that the general ledger and transactions that resulted in them are accurate. These objectives include occurrence and rights and obligations, which refer to specific items in the audit report footnote sections, and thus, confirm that these items are either obligations or rights of the auditee.

References

James Peters. (2016). Auditing.

Keller, N. (2018). Assessment & Auditing Perspectives.

Reinstein, A., Churyk, N. T., & Tate, S. L. (2018). Analyzing pedagogical approaches used in second auditing courses. Advances in accounting, 42, 110-124.