Chapter 2 Auditor’s Responsibilities

Statement of directors’
responsibility

Board of Directors Board of directors include both Executive directors and

Non-executive directors.

Executive
● Responsible for decision-making within the business and
the preparation of the financial statements.
Non-executive
● Don’t make executive decisions
● Don’t prepare financial statements
● Review the financial statements prepared by the executive
and the internal controls of the company in order to assess
the efficiency and the effectiveness of the company’s
performance.

TCWG: those charged with governance – executive officers.

Internal auditors 3 responsibilities of internal auditors

● Review internal control of the company
● Review FS prepared
● Help in interpreting the IFRS principles and many more.

Internal auditor is only a part of the Internal control.

Director’s accountability

Director’s accountability is given to the shareholders.

There are 2 main accountabilities: communication and investment
protection.
● They account investment protection by having internal
auditors having internal control and have risk policies.
 Director’s statutory duties

Going concern disclosure Going concern is when the company is expected to operate in the
unforeseen future which is within 12 months. The financial
statements are prepared on the Going concern basis.

If the company is not going concern, the financial statements are

prepared using ‘break-up basis’. Instead of using the historical cost,
they are using the ‘fair market value’ instead because they have to
liquidate the assets. This answer why it is important for
shareholders to know whether the company will be going concern
or not.

The right of auditors The rights of the auditors are to

- Get access into information or get explained for any situation. This
can be used as evidence to their audit report and can also help the
auditors under the company better.
- Get informed of any general meetings. Though, they don't have
the right to be informed or to participate in the board meeting unless
are asked.
- To attend and speak at the general meeting because the general
meeting is a meeting that both BOD and shareholders meet and the
responsibility of the BOD at the meeting is to get shareholders
informed of the company's situation. Thus, if there's any odd in the
company that is not disclosed by the directors to the shareholders,
the auditors will have to be the one to let shareholders know
through speaking at the general meeting.

Fraud and error

 Financial statements misstatements include both Fraud and Error.

Fraud
● Intentional
● Type of fraud
○ Misrepresenting the FS: window dressing (showing a
better picture in the FS, such as profit, than it really is
through manipulation of the FS)
○ Misappropriation of assets: stealing of assets, using
the company assets for personal use.

Error
● Unintentional

NOTE
Directors have the responsibility to prevent fraud. Meanwhile,
the internal auditors review if the internal control procedures are
efficient and effective. Thus, it’s not the role of the internal
auditors to prevent fraud.
Internal controls mean prevention, detection, and correction.
Internal auditors are parts of the internal controls only, thus under
the directors (audit committee).

Professional skepticism The auditor shall maintain professional skepticism throughout the
audit.

Professional skepticism: Maintaining a questioning mind, being

alert to the risk of material misstatements.

Contract law

Engagement letter Engagement letter is a legal contract between external auditors and
clients.

It includes the responsibility of the management and the auditors

responsibilities.

How the auditors are chosen?

Choosing auditor: When the shareholders have agreed on the
auditor, they sign a resolution paper and give it to the directors to
represent and sign the engagement letter with the auditor.
Directors’ responsibilities in
the engagement letter.
3 things that need to be
fulfilled in order to
successfully sue an auditor.
Third parties and negligence
The company can sue the auditors for negligence but they have to
gather the evidence first, which includes 3 elements:
● Duty of care: bound by law to provide a duty of care.
● Negligence: Have to prove that auditors didn't perform their
duty professionally such as not having professional
skepticism or not following the ISA (International Standard of
Audit).
● Damages: Have to prove that the negligence of the auditors
has caused them monetary losses.
Can the third parties sue the
auditors?
E-Portfolio
Identify the rights of an
auditor
Identify two disadvantages of
an audit
Identity three responsibilities
of directors
Explain two reasons why
auditors can only provide
reasonable assurance
Identify and explain the three
conditions that must exist for
a third party to be successful
in negligence claims against
an auditor.
Yes, by providing all the 3 elements above (duty of care,
negligence, and damages). The problem is that it’s hard for them to
prove duty of care because there’s no contract between the auditors
and the clients. If there’s no contract, it’s difficult to prove duty of
care. However, the duty of care can be proved if the auditors knew
that the third parties will use financial statements.
The rights of an auditor are
● Access to documents and records that is needed as an audit
evidence.
● Receive all information and explanation they require.
● Attend and received notice about general meetings and right
to speak at the general meetings on relevant matters.
>> Done
>> Done
>> Done
>> Done