Aduiting

Statements on Auditing Standards: Illegal Acts by Client

Nkechi O’Garro

ACCT 470: Auditing

Assignment 11-4

December 18, 2013

The term illegal acts, for purposes of this section, refer to violations of laws or governmental regulations. Illegal acts by clients are acts attributable to the entity whose financial statements are under audit or acts by management or employees acting on behalf of the entity. Illegal acts by clients do not include personal misconduct by the entity's personnel unrelated to their business activities (AICPA, 1989).

The Illegal Acts by Clients, No. 54, of the Statements on Auditing Standards (SASs), where written while I was still in elementary school, with the exception of the deletion of Consideration of Internal Control in a Financial Statement Audit and the Foreign Corrupt Practices Act [Deleted November 2006.] and Material Weaknesses in Internal Control and the Foreign Corrupt Practices Act [Deleted March 2009.] (American Institute of Certified Public Accountants, Inc.), and a few revisions that took place in March 2006 and April 2007, this SAS has remained the same.

An auditor is required to audit financial statements based on GAAP, if the auditor concludes that an illegal act has a material effect on the financial statements, and the act has not been properly accounted for or disclosed, the auditor should express a qualified opinion or an adverse opinion on the financial statements taken as a whole, depending on the materiality of the effect on the financial statements (AICPA, 1989). This statement leaves the door wide open for potentially “legal” illegal acts by a client.

A very business savvy client and his/her lawyers can completely render a company bankrupt and it would be legal because it has been disclosed in accordance to GAAP. This can occur if the auditor concludes that an illegal act has a material effect on the financial statements, and the act has been properly accounted for or disclosed,...