The Fundamental Duty Of An External Financial Audit Essays

The Fundamental Duty Of An External Financial Audit Essays

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QUESTION 1: Auditors’ Duties and Responsibilities
The fundamental duty of an external financial auditor is to form and express an opinion on whether the reporting entity’s financial statements are prepared in accordance with the relevant financial reporting framework. In discharging this duty, the auditor must exercise “reasonable skill, care and caution” (Lopes, J. in Kingston Cotton Mill Co 1896) as reflected in current legal and professional requirements.

Required: Identify and explain (in your own words) the key requirements that an auditor must follow in order to meet the “reasonable skill, care and caution” criteria in an audit of a Financial Market Conduct (FMC) reporting entity in New Zealand. Provide appropriate references.
Exercise of “reasonable skill, care and caution” varies according to situations (Lopes, J. in Kingston Cotton Mill Co 1896). Nevertheless, to achieve such in performing an audit, its an auditors responsibility to comply with the requirements cited in ISA (NZ) 200, as follows (1) Ethical requirements Relating to an Audit of Financial Statement: Professional and Ethical Standard 1 (2) Professional Sceptism (3) Professional Judgment (4) Sufficient Appropriate Audit Evidence and Audit Risk (5) Conduct of an Audit in Accordance with ISAs (NZ).

Professional and Ethical Standard 1 (PES 1). As per ISA (NZ) 200-A17, this ethical requirement includes the auditors integrity, objectivity, professional competence and due care, confidentiality, & professional behaviour. Integrity is an ethical attitude which includes the auditor’s honesty, accuracy, and fair practice. Objectivity is a mental attitude while carrying out the audit wherein the auditor is fair and just with all his/her work. Professional competen...

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...e not limited to the legal fees because the auditor would also have to consider the lost opportunity cost whenever the auditor have to attend hearings or meet anyone related to the case instead of doing his/her own audit works. Thus, even though the auditor/auditor knows that they can win in a court battle, they will still go for a settlement since it is less costly.
The audit firm/auditor don’t want to taint their integrity because of allegations (proven or not) that the audit was performed without duty of care.
In a common law, it is hard for auditors to determine to whom they owe their duty of care nor the reasonable skill, care and caution that they have to perform because these may change over the course of the audit.

Porter, B., Simon, J., & Hatherly, D. (2008). Principle of external auditing (3rd ed.). West Sussex, England: John Wiley & Sons, Ltd.

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