Illegal Acts Flashcards
Illegal acts have financial statement implications in that
the client may be faced with fines or penalties as a result of the illegal acts.
Such contingencies should be recognized in the financial statements
A couple of reasons why an auditor is not expected to uncover all illegal acts.
some problems (such as pollution) simply do not refer directly to financial reporting.
In addition, the audit client will often make a concerted effort to hide illegal acts so that the auditor is unaware.
Differences between direct and indirect illegal act
Direct illegal act has already had an impact on the financial statements.
An indirect illegal act will only impact the financial statements if the company is ever caught and punished.
Most illegal acts affect the financial statements indirectly
Defalcation
is theft
Lapping
the coverage of theft by using amounts received from one customer to cover earlier balances received from other customers and then stolen
Kiting
When money is moved from one account to another but the deposit and the withdrawal are recorded in different time periods to inflate the amount of cash being reported
Auditors are required to
inquire of members of management about their knowledge of fraud and alleged fraud,
their understanding of the risks of fraud,
and program and controls that have been implemented to mitigate those risks.
Auditors also make inquires of management regarding their policies for detecting illegal acts and preventing illegal acts.
inquiry of management about its communications with the audit committee or others charged with governance as well as optional inquiry of other parties, such as legal counsel and internal audit staff.
If the auditors conclude that an illegal act has occurred, they should
attempt to assess the impact of the actions on the financial statements, including the adequacy of disclosure - this usually requires consulting legal counsel or another specialist.
The auditor should also discuss the situation with top management and notify the audit committee of the board of directors.
The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act
to enforce auditing, quality control, and independence standards in connection with the independent audit of publicly-traded companies.
NOT ACCOUNTING
If an auditor uncovers an illegal act at a public company, the auditor must notify
The SEC due to the the Private Securities Reform Act of 1995, includes a requirement for fraud reporting, or whistleblowing by the auditor
If the auditors believe that an illegal act has occurred, they should
consider accumulating additional evidence to determine if there is actually an illegal act and attempt to assess the impact of the actions on the financial statements.
This usually requires consulting legal counsel or another specialist.
The auditor should also inquire of management at a level above those likely to be involved with the illegality before reaching a conclusion about the situation.
