PA 603 AUDITING AND ASSURANCE

MEMBER’S GROUP : QURATULAINI BT HASRI (10DAT11F2009) SHARIFAH NUR AFIZA BT SYED AHMAD MUSTAFA (10DAT11F2013) NURAZARIAH BT RAHIMAN (10DAT11F2022) NUR HUZAIFAH BT ZULKIFLI (10DAT11F2030)

7.1 Understand the nature of audit liabilities

7.1.1 Define the fraud 7.1.2 Differentiate between fraud and error

7.1.1 Definition Fraud

• Refers to an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving use of deception to obtain an unjust or illegal advantage

• Involve manipulation, falsification or alteration of record or document; misappropriation of assets

• Fraud is most common in the buying or selling of property, including real estate and intangible property such as stock, bonds and copyright.

• Commonly understood as dishonesty calculated for advantage. may be called a fraudA person who is dishonesty

7.1.2 Differentiate between Fraud and Error

FRAUD ERROR

Refers to all grants, information or opinion on the financial accounting system by someone.

Referring to the offense by an inadvertent act.

An intentional act to alter financial information.

Unintentional act or without intention.

Use policy deliberately inaccurate. Mistake in the application of policies.

Altering or falsifying documents. Misstated note

Get rid of or eliminate the effects of the transaction documents.

The facts are wrong meaning.

Example : have saving : record deal that never happened.

Example : the number of wrongly recorded in the accounts.

7.2 Understand the audit legal liabilities7.2.1 Define the legal liability

7.2.2 Identify legal acts that govern auditor’s liabilities

7.2.3 Discuss each type of liabilities :a) Liability to client

b) Liability to third partyc) Fraud

7.2.4 Relate each type of liability with current audit cases

7.2.5 Determine factors that help to minimize the auditor liabilities

7.2.1 DEFINITION LEGAL LIABILITY

• Auditor may be held liable to third parties under statutory law

• Companies act 1965 and the securities common act 1963

• Most prominent statutes affecting an auditor’s legal liability

• Legal liability is a term applied to being legally responsible for a situation, and is often associated with a subcontract, especially if the terms of that contract are not fulfilled.

IDENTIFY LEGAL ACT THAT GOVERN AUDITOR’S LIABILITIES

• Many accounting and legal professionals believe that a major cause of law suits against CPA firms is financial statement users’ lack of understanding of two concept :

* The difference between a business failure and an audit failure * The difference between an audit failure and audit risk

1) Business 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

2) Audit Failure

Occurs when the auditors issues an incorrect audit opinion because it failed to company with the requirements of auditing standards.

3) Audit Risk

Represents the possibility that the auditors concludes after conducting an adequate audit that the financial statements were fairly stated when in fact, they were materially misstated

Types of Liabilities

1. Liabilities to Client2. Liabilities to Third Parties3. Fraud

1. LIABILITY TO CLIENT• The most common source of lawsuits against CA’s is from

client • The suit vary widely, including such as failure to complete

a non audit engagement on the agreed-upon date, inappropriate withdraw from an audit, failure to discover and embezzlement (their or assets) and breach of the confidentiality requirement of CA’s.

• A tort is a wrongful act other than breach of contract for which civil action may be taken

• When an auditors fails to carry out contractual arrangements with the clients, the auditor may be held liable for breach of contract or negligence.

• The CA firm normally use on or a combination of four defenses when there are legal claims by clients

* Lack of duty to perform the service* Non-negligent performance* Contributory negligence* Absence of causal connection

Case Related

A) Wilde ad othera Vs Cape and Dalgeish

Kes ini berlaku pd tahun 1897, di mana seorg juruaudit gagal menemui penipuan disebabkan buku simpanan tunai tidak diperiksa. Juruaudit tersebut cuba membela dirinya dengan memberikan alasan bahawa pengauditan tunai tidak termasuk dalam perjanjian. Mahkamah tidak menerima alasan tersebut dan beliau didapati bersalah kerana kecuaian.

B) Smith Vs Sheard

Kes ini berlaku pada 1906, di mana juruaudit syarikat yang telah dilantik gagal menemui penipuan akibat pemeriksaan yang tidak dibuat. Alasannya adalah tidak terdapat perjanjian berkaitan perkara tersebut jadi pemeriksaan tidak dibuat. Alasan ini ditolak oleh mahkamah dan juruaudit bertanggungjawab di atas kesalahannya.

2. Liability to third Party(Case Related)

A) Ultramares Vs Touche & Co.

Kes ini berlaku di New York pada tahun 1931. Juruaudit yg dilantik utk mengaudit sebuah syarikat yg mengimport dan menjual getah telah melaporkan bahawa syarikat tersebut mempunyai kedudukan kewangan yg kukuh tetapi sebenarnya adalah sebaliknya. Berasaskan laporan yang diberikan, sebuah syarikat kewangan telah memberikan pinjaman kpd syarikat pengimport getah ini. Akhirnya, syarikat kewangan gagal mengutip hutang dengan sepenuhnya.

B) Rush Factors Vs Levi

Pihak pelaintif telah menyuruh defendan seorang juruaudit untuk memperoleh pinjaman daripadanya. Penyata kewangan yg telah disahkan drp juruaudit menunjukan bahawa syarikat tersebut mempunyai kemampuan untuk bayar balik tetapi pada keadaan sebenarnya tidak mampu. Rush Factors telah mendakwa juruaudit bagi kerugian yg telah ditanggung akibat bergantung kpd pandangan juruaudit yg salah tafsir penyata kewangan. Mahkamah memberikan keputusan kpd pihak plaintif.

3. Fraud( Case Related )

A) London and General Bank

Kes ini berlaku di England pada tahun 1895. Di dalam kes ini, seorg juruaudit telah membuat laporan kpd seorg pengarah dgn menyatakan bahawa sandaran yg diterima berdasarkan wang yg diberi pinjam kpd syarikat lain tidak memuaskan.

Walau bagaimanapun, laporan kpd pemegang syer tidak menyatakan hal ini dengan jelas. Dengan ini, nilai yg dinyatakan dalam kunci kira-kira adalah tinggi, tidak benar dan saksama. Oleh itu, dividend yg diisytiharkan dan bayaran dividend tersebut telah dikeluarkan drp modal.

Syarikat menghadapi kerugian yg besar akibat juruaudit gagal menjalankan tugasnya. Keputusan telah dibuat supaya juruaudit membayar ganti rugi kpd syarikat tersebut.

B) Kingston Cotton Mill

Kes ini berlaku di England pada tahun1896. Dalam kes ini, juruaudit telah menerima surat pengesahan stok drp pengurus yg juga seorg pengarah syarikat dan ianya seorg yg dihormati. Tetapi surat pengesahan menunjukan nilai stok lebih drp nilai sebenar. Akhirnya, pembayaran dividend tersebut diambil drp modal.

Juruaudit telah didakwa atas kecuainya. Walau bagaimanapun, juruaudit didapati tidak bersalah kerana mengembalikan jumlah stok bulanan tugasnya. Sudah memadai baginya utk bertindak berdasarkan surat pengesahan drp seorg yg dipercayai kejujurannya.

In Malaysia, legal action may be brought against auditors for violating either Securities Commission Act 2003 or Company Act 1965

• Under Companies Act 1965– Section 46 – an auditor as an expert who authorities and cause the issue

of the prospectus is liable to pay compensation to person who purchases share or debentures on the faith of the prospectus for any loss sustained by reason of untrue statements or willful non-disclosure of any mater which is material

• Under Securities Commission Act 2003– Section 57 – any third party who purchased securities described in the

registration statement may sure the auditor for material misrepresentations or omissions in audited financial statements included in the registration statement

FACTOR THAT HELP TO MINIMIZE THE AUDITOR LIABILITIES

• Standard and rule setting- The respective accounting bodies and oversight boards

must constantly set standard and revise them to meet the changing needs of auditing

• Oppose lawsuits- CA firms must continues to oppose unwarranted lawsuits even if in the short run the costs of winning are greater than the costs of settling

• Education of users- Accounting bodies, leaders of CA firms and educators should educate investors and other who read financial statements as to the meaning of an auditor’s opinion and to the extent and nature of the auditor’s work

• Sanction members for imprper conduct and performance- A profession must be able to police its own membership

• Engagement leaders should deliver and discuss engagement letters- Engagement letters are contracts, the enforceability of which depends on both parties understanding the contents

• Tailor engagement practice aids to meet the needs of clients- Professional judgment is now required for both audits and reviews

THANK YOU