[Anonymous]

In connection with the financial statements, an independent auditor could be responsible for failure to detect a material fraud if:

A Statistical sampling techniques were not used on the audit engagement.

B Accountants performing the important parts of the work failed to discover a close relationship between the treasurer and cashier.

C The auditor planned the audit in a negligent manner.

D The fraud was perpetrated by one employee who circumvented the existing internal controls.

Ans is C, my question is why cant it be D? or is this just a stupid question?

[SeattleAccountant]

Out of all answers, #C is the one that pertains to direct responsibility of auditor (per GAAS).

Choice #D is not correct b/c auditor may or may not detect fraud. He must employ appropriate techniques and methods to do so to be satisfied and follow GAAS.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[SeattleAccountant]

Out of all answers, #C is the one that pertains to direct responsibility of auditor (per GAAS).

Choice #D is not correct b/c auditor may or may not detect fraud. He must employ appropriate techniques and methods to do so to be satisfied and follow GAAS.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[barelystayingsane]

Like SeattleAccountant said, C is the best answer, because the keyword “negligent” shows that the auditor failed to exercise due professional care, and that's one of the rules in the AICPA Code of Professional Conduct. The auditor only provides reasonable assurance, not absolute assurance, that the FS are free of material misstatement, so something could still slip past him even if he performs the audit properly.

[barelystayingsane]

Like SeattleAccountant said, C is the best answer, because the keyword “negligent” shows that the auditor failed to exercise due professional care, and that's one of the rules in the AICPA Code of Professional Conduct. The auditor only provides reasonable assurance, not absolute assurance, that the FS are free of material misstatement, so something could still slip past him even if he performs the audit properly.

[Anonymous]

@SeattleAccountant and barelystayingsane:

An independent auditor could be responsible for failure to detect a material fraud if the fraud was perpetrated by one employee who circumvented the existing internal controls.

Is there anything wrong with this statement? It does not say will be responsible, it says could be responsible if he have missed to detect a material fraud when an employee was involved.

I agree with both of you, but do not still seem to understand why D is wrong.

@ not sure who: fixed the title of my post. Thank you. I think it could be Jeff…

[Anonymous]

@SeattleAccountant and barelystayingsane:

An independent auditor could be responsible for failure to detect a material fraud if the fraud was perpetrated by one employee who circumvented the existing internal controls.

Is there anything wrong with this statement? It does not say will be responsible, it says could be responsible if he have missed to detect a material fraud when an employee was involved.

I agree with both of you, but do not still seem to understand why D is wrong.

@ not sure who: fixed the title of my post. Thank you. I think it could be Jeff…

[jeff]

Yes – I figured you'd get a better response vs “which one?” 🙂

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[jeff]

Yes – I figured you'd get a better response vs “which one?” 🙂

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[barelystayingsane]

As long as his audit documentation shows that he complied with GAAS, then no, he's not responsible. If an auditor was held responsible for missing anything material, then he'd obtain absolute assurance, and that's just not reasonable. The nature of fraud is that it is intentionally perpetrated by someone, so they're going to try to cover that fraud up. It's reasonable to believe that an auditor might not catch fraud.

[barelystayingsane]

As long as his audit documentation shows that he complied with GAAS, then no, he's not responsible. If an auditor was held responsible for missing anything material, then he'd obtain absolute assurance, and that's just not reasonable. The nature of fraud is that it is intentionally perpetrated by someone, so they're going to try to cover that fraud up. It's reasonable to believe that an auditor might not catch fraud.

[Anonymous]

@barelystayingsane: auditor give reasonable assurance that FS are free from material error and fraud.

Hence an auditor is responsible to find anything material.

[Anonymous]

@barelystayingsane: auditor give reasonable assurance that FS are free from material error and fraud.

Hence an auditor is responsible to find anything material.

[barelystayingsane]

@cpa_man no, that is not correct. If the auditor provided ABSOLUTE assurance, then your statement would be correct. Besides, the auditor typically has to rely on persuasive evidence, not conclusive evidence. Auditing is not an absolute science. The auditor is responsible for complying with GAAS. If he complies with GAAS, then yes, it follows that he will most likely find most, if not all, material misstatements out there. However, management may not give the auditor complete information, because they're attempting to cover up fraud. Is that the auditor's fault? No.

[barelystayingsane]

@cpa_man no, that is not correct. If the auditor provided ABSOLUTE assurance, then your statement would be correct. Besides, the auditor typically has to rely on persuasive evidence, not conclusive evidence. Auditing is not an absolute science. The auditor is responsible for complying with GAAS. If he complies with GAAS, then yes, it follows that he will most likely find most, if not all, material misstatements out there. However, management may not give the auditor complete information, because they're attempting to cover up fraud. Is that the auditor's fault? No.

[barelystayingsane]

Another thing: the auditor is NOT a guarantor that the financial statements are free of misstatement. It is not practical or possible to obtain assurance beyond all doubt. I don't know how else to explain this. This may just need to be a fact nugget that you memorize.

[Author]

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