The auditor's duty of reasonable care and skill and the expectation to detect fraud

- Kujinga, Benjamin Tanyaradzwa

Title
The auditor's duty of reasonable care and skill and the expectation to detect fraud
Creator
Kujinga, Benjamin Tanyaradzwa
Subject
Auditing Standards
Subject
Accounting fraud
Subject
Financial statements -- Law and legislation
Date
2008
Type
Thesis
Type
Masters
Type
LLM
Identifier
vital:11115
Identifier
http://hdl.handle.net/10353/104
Identifier
Auditing Standards
Identifier
Accounting fraud
Identifier
Financial statements -- Law and legislation
Description
Auditors perform a very important task within the context of the affairs of a company because financial reporting can only serve its purpose if stakeholders can rely on its accuracy and reliability. An auditor’s duty is to opine whether an entity’s financial reporting has been done according to the requirements of the law. The responsibility of reporting according to the law lies with an entity’s directors. Auditors cannot issue an absolute assurance as to the lawfulness and reliability of an entity’s financial reporting. However when it is subsequently discovered that the financial reporting was incorrect and that fraud has occurred auditors are often blamed and sued for enormous amounts of money for failing to detect material anomalies in the financial reports. These actions are based on the fact that auditors have a duty to exercise reasonable care and skill in the performance of their duties and through their failure to act as such, have caused financial harm to the clients or third parties. The fact that auditors are only required by law to exercise reasonable care and skill and perform an audit according to the standards of the reasonable auditor and not the most meticulous one, is often not regarded or is sometimes deliberately ignored. This clearly represents a problem in our law, namely that the presence of fraud in financial reports does not in itself suggest negligence on the part of the auditor but is apparently often perceived to do so. This research shows that the auditor’s duty of reasonable care and skill does not necessarily entail the duty to detect fraud. The elements of the duty of reasonable care and skill are identified from case law, legislation and international auditing standards. In order to limit the liability of auditors in general it is important to focus also on the elements of fault (negligence), wrongfulness and causation. This research shows that negligence cannot be established merely by the presence of fraud or material misstatements in financial statements. The responsibility for fair financial reporting lies with the directors. This research gives prominence to this fact which often seems to be ignored for convenience and in order to place the blame on the auditors. This research implicitly asks the question, why are auditors being held responsible for material misstatements in a company’s financial statements and not the directors? Guidelines for determining the extent of an auditor’s liability in this regard are formulated in this research.
Format
xiii, 160 leaves
Format
pdf
Publisher
University of Fort Hare
Publisher
Faculty of Law
Language
English
Rights
University of Fort Hare
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