Duty of Care in Auditing: Legal Perspectives

a) The compliance with the laws and regulations is what ISA 250 is focused on. The management has a duty of ensuring that the company is following the applicable laws and regulations. The auditor has a duty to report to the management at a higher level than those invloved if there is any non-compliance. If it happens that it is the management involved the report should be made to those responsible for governance which is the non-executive directors. If there are no non-executive directors, an audit opinion is formed. If none of this is possible then the auditor should step down because of lack of confidence in the directors. It may however be required of the auditor to report to the audit authority specifically the ones working in the financial service sector or in some cases the auditor may report to the professional body. If as a result of the non-compliance the financial statement fails, the shareholders will be notified to give an honest and fair view. This is because it causes a possible fundamental uncertainty that may lead to it becoming an issue of concern. For instance the government can take away the franchises of some real companies because of non-compliance with the laws and regulations and this will lead to the futures of such businesses being down due to worry of going and may result in the auditor having to report it in the audit report.

b) There are a number of situations that should be taken into consideration when planning the audit of a charity. It is important for the auditor to be well aware of the requirements of the charity’s constitution as well as that the engagement letter is agreed with and the policies of accounting are appropriate. During the planning of the charity audit, statutory audit verification is a needed. The auditors should know if there are any issues with internal controls and the system of accounting as well as any previous experience with the client. The acceptability of the accounting policies should be well examined by the auditors and also if these policies are sufficiently disclosed in the financial statements. The details in the financial statements should be checked by the auditor to confirm if they are adequate. The income for charities is usually hard to predict therefore charity audits are somehow different to other audits. For this reason, understanding of the requirements outlined by the charity’s constitution incorporating restricted funds is very important. The charity is differently affected by tax regulations for instance charity against the gift aid band. When the charity has low accumulated funds, it will rely on future income from continuation of grants or voluntary sources. Therefore the eligibility of applying of going concern should be carefully analysed by the auditors. The lack of the predictability of income makes it hard to recognize the revenue. Charities have a problem with controlling risks because the charity trustees may not be well informed about the issues of accounting involved, supervising of the employees, clear division of duties and majority of the time income may be gotten in form of cash from a number of sources.

c.)An audit client is allowed to outsource its internal audit function if the methods of attaining the respective objectives are the same for both the internal and external auditors. It may also be outsourced if the client does not want to invest money in the training and recruitment of people who are experts. Even though external audits depend on the work of internal audit, the will still have a full obligation for their audit opinion. A number of safeguards should be taken into considerations for example organizational status, technical competence as a result of professional care, scope of function, who they report to, if there are any restrictions with their work and communication with external auditors.

d.)Audit analysis helps in identifying inconsistencies and provides adequate evidence for audits and may also be used in investigations. Increasing the analysis techniques of data and methods has a lot of advantages such as helping the auditor plan early, helps in a clear and better asses risks better based on trends that are uncovered or any inconsistencies and it also helps in upholding audits of high quality. Generally, it will result in better communication of any or more problems to the client.

Some of the disadvantages however include; mid-tier firm auditors might not have adequate training or experiences for the new set of competencies, the cost of data analysis tools may not be affordable to medium-sized firms, poor quality of data and inaccessibility might hinder the use of data analysis.

c)The current guidance for when duty of care between an auditor and a third- party exist is provided by the law. A tripartite test for duty of care was formed;

It is can be reasonable be foreseen that the defendants negligence caused the loss suffered.

Enough proximity exits which stands for the relationship between plaintiff and auditor but there is not test for proximity here it therefore has to be viewed as case to case.

It is logical, impartial and honest to impose liability

It was argued by the courts that there was a necessity to differentiate proximity and foreseeability. Step one is that the defendants have to be able to tell that damage could happen because of negligence. Secondly is the proximity between plaintiff and defendant. If the purchaser owned company shares but when he wanted to invest more he occupied the same position as any other investor in the public not owed duty of care by the auditors.

So that auditors are aware that they owe duty of care, they have to be able to identify party claiming to rely and the anticipated transaction’s nature. Is the given advice direct or indirect and how is it probable that the third party will rely on advice and take part in the transaction? If a disclaimer of responsibility is issued by the auditors it is essential to turn down duty of care and because the Capro case successful litigation against auditors is hard.

It was concluded by the court that, any disclaimer of liabilities to third-parties being absent is an important factor contributing to the duty of care that is owed to them. In case the defendants provide a disclaimer for the consequences of any dependence of the plaintiff’s place, it would not have been possible to imply that the auditor had assumed liability to the plaintiff.