Phạm Thị Ngọc Bích – Audit Dept.

– SOA – COB - UEH

CHAPTER 2
Part 2
AUDITOR’S
PROFESSIONAL AUDITOR’S
ETHICS AND RESPONSIBILITY
RESPONSIBILITY

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Content AUDIT EXPECTATION GAP

1. Audit expectation gap
2. Auditor’s Responsibilities in conducting an audit of
financial statements
3. Auditor’s responsibilities for detecting Fraud
4. Auditor’s responsibilities regarding Noncompliance
with laws and regulations (noncompliance)
5. Auditor’s Legal liability

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The information gap Three major issues in the

expectation gap
o Currently there is an ‘information gap’ between what users
believe is needed to make informed investment and fiduciary o Early warning by auditors of corporate failure
decisions, and what is available to them through the entity’s o Auditor’s responsibility for the detection and reporting of
audited financial report or other publicly available earnings management and fraud
information.
o A perception exists that there should be more transparency o The auditor’s ability to communicate different levels of
about: assurance
(a) the entity and its financial report, particularly key financial reporting
risks and how they are being addressed; and
(b) the audit performed, including key areas of audit risk.

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AUDITOR’S REPONSIBILITY
o ISA/VSA 200  Overall objectives Overall Objectives of the Independent
o ISA/VSA 240  Responsibility relating to fraud
Auditor and the Conduct of an Audit in
o ISA/VSA 250  Responsibility regarding
noncompliance to law and regulation Accordance with ISAs/VSAs
o ISA/VSA260  Communication with those
charged with governance – ISA/VSA 200

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IAS 200
Overall objectives
Overall objectives o In conducting an audit of financial statements, the overall
objectives of the auditor are:
(a) To obtain reasonable assurance about whether the FS as a whole
Requirements are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the FS
are prepared, in all material respects, in accordance with an applicable
Level of assurance: Reasonable financial reporting framework; and
(b) To report on the FS, and communicate as required by the ISAs, in
accordance with the auditor’s findings
Distinguish auditor’s responsibility from
management’s responsibility

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Overall objectives Applicable financial reporting framework

o In all cases when reasonable assurance cannot be There are 2 frameworks:
obtained and a qualified opinion in the auditor’s report is
insufficient in the circumstances for purposes of reporting
- Fair presentation framework
to the intended users of the financial statements, the ISAs - Compliance framework
require that the auditor disclaim an opinion or withdraw
(or resign) from the engagement, where withdrawal is
possible under applicable law or regulation. The applicable financial reporting framework used
in Vietnam is ………………………………

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Fair presentation framework Compliance framework

A framework that requires compliance with the requirements of
the framework and: A framework that requires compliance with the
(i) Acknowledges explicitly or implicitly that, to achieve fair requirements of the framework , but does not contain
presentation of the financial statements, it may be necessary for the acknowledgements in (i) or (ii) above.
management to provide disclosures beyond those specifically
required by the framework; or
(ii) Acknowledges explicitly that it may be necessary for
management to depart from a requirement of the framework
to achieve fair presentation of the financial statements. Such
departures are expected to be necessary only in extremely rare
circumstances.
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Requirements Professional skepticism

o Shall comply with relevant ethical requirements, including o An attitude that includes a questioning mind, being alert to
those related to independence; conditions which may indicate possible misstatement due to
o Shall plan and perform an audit with professional error or fraud, and a critical assessment of audit evidence.
skepticism; o Professional skepticism includes being alert to, for example:
o Shall exercise professional judgment in planning and n Audit evidence that contradicts other audit evidence obtained.
performing an audit; n Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence.
o Shall obtain sufficient appropriate audit evidence; and
n Conditions that may indicate possible fraud.
o Shall comply with all ISAs relevant to the audit n Circumstances that suggest the need for audit procedures in addition
to those required by the ISAs.

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Professional judgment Professional judgment

o The application of relevant training, knowledge o Professional judgment is necessary in particular regarding
and experience, within the context provided by decisions about:
o Materiality and audit risk.
auditing, accounting and ethical standards, in
o The nature, timing and extent of audit procedures used to meet
making informed decisions about the courses of the requirements of the ISAs and gather audit evidence.
action that are appropriate in the circumstances of o Evaluating whether sufficient appropriate audit evidence has
the audit engagement. been obtained, and whether more needs to be done to achieve the
objectives of the ISAs and thereby, the overall objectives of the
auditor.
o The evaluation of management’s judgments in applying the
entity’s applicable financial reporting framework.
o The drawing of conclusions based on the audit evidence obtained,
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for example, assessing the reasonableness of the estimates made18
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– COB financial statements.
- UEH

Distinguish auditor’s responsibility from

Level of assurance: reasonable management’s responsibility

o Reasonable assurance – a high, but not Management Auditor

absolute, level of assurance. Has responsibility: - Has responsibility to express
- for the preparation of the FS in on opinion on the fairness of
o Why only reasonable assurance? accordance with the applicable FS.
 Inherent Limitations of an Audit: financial reporting framework, - Does not assure the future
including, where relevant, their viability of the entity nor the
 The nature of financial reporting; fair presentation;
management’s efficiency or
 The nature of audit procedures; and - for such internal control over effectiveness in conducting
financial reporting
 The need for the audit to be conducted within a the affairs of the entity.
reasonable period of time and at a reasonable cost. - Does not reduce
management’s responsibility
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ISA 240 - Responsibility relating to fraud Objectives

(a) To identify and assess the risks of material
o Objectives misstatement of the financial statements due to fraud;
o Definitions (b) To obtain sufficient appropriate audit evidence
o Requirements regarding the assessed risks of material misstatement
due to fraud, through designing and implementing
o Responsibility relating to
appropriate responses; and
fraud
(c) To respond appropriately to fraud or suspected
fraud identified during the audit.

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Definitions Responsibility relating to fraud

o Fraud – An intentional act by one or more ISA200 stated overall objectives of an audit:
individuals among management, those charged - To obtain reasonable assurance about
with governance, employees, or third parties, whether the FS as a whole are free from
involving the use of deception to obtain an unjust
material misstatement, whether due to
or illegal advantage.
FRAUD or ERROR.
o Fraud risk factors – Events or conditions that
indicate an incentive or pressure to commit fraud
or provide an opportunity to commit fraud.

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Responsibility relating to fraud Requirements

o The primary responsibility for the prevention and o Maintain professional skepticism throughout the audit,
detection of fraud rests with both those charged with recognizing the possibility that a material misstatement
governance of the entity and management. due to fraud could exist;
o The risk of not detecting a material misstatement resulting o Have a discussion among the engagement team members
from fraud is higher than the risk of not detecting one and place particular emphasis on how and where the
resulting from error due to: entity’s financial statements may be susceptible to
n sophisticated and carefully organized schemes designed to material misstatement due to fraud;
conceal it; o Identify and assess fraud risks;
n Collusion
o Response to fraud risks identified and assessed:
o Higher risk of management fraud n Overall responses
n Procedures responsive to fraud risks at the assertion level
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n Procedures responsive to risks related to Management override of
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Overall responses Overall responses

To address the assessed risks of material misstatement due to To address the assessed risks of material misstatement due to
fraud at the FS level, including: fraud at the FS level, including:
o Assign more additional individuals with specialized skill o Incorporate an element of unpredictability in the selection
and knowledge, or assign more experienced individuals to of the nature, timing and extent of audit procedures:
the engagement; and supervise more team members;  Performing substantive procedures on selected account balances
o Evaluate whether the selection and application of and assertions not otherwise tested due to their materiality or risk.
accounting policies by the entity, particularly those related  Adjusting the timing of audit procedures from that otherwise
expected.
to subjective measurements and complex transactions,
 Using different sampling methods.
may be indicative of fraudulent financial reporting
 Performing audit procedures at different locations or at locations on
resulting from management’s effort to manage earnings; an unannounced basis.
and
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Procedures responsive to fraud risks at the Procedures responsive to risks related to

assertion level Management override of controls
Design and perform further audit procedures whose nature,
Design and perform further audit procedures whose timing and extent are responsive to the assessed fraud risks at
nature, timing and extent are responsive to the the assertion level:
assessed fraud risks at the assertion level: o Test the appropriateness of JE and other adjustments, e.g.,
unusual or at the end of reporting period;
o Review accounting estimates for biases and evaluate
whether the circumstances producing the bias;
o Evaluate the business rationale of significant transactions
that are outside the normal course of business for the
entity.

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Auditor Unable to Continue the

Engagement
o Determine the professional and legal
responsibilities applicable in the circumstances; ISA/VSA 250 - Responsibility
o Consider whether it is appropriate to withdraw from
the engagement; regarding noncompliance to law and
o If the auditor withdraws:
n Discuss with the appropriate level of management and regulation
those charged with governance the auditor’s withdrawal
from the engagement and the reasons for the withdrawal;
and
n Determine whether there is a professional or legal
requirement to report to the person or persons who made
the audit appointment or, in some cases, to regulatory
authorities
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Objectives Definitions
o (a) To obtain sufficient appropriate audit evidence o Non-compliance – Acts of omission or commission,
regarding compliance with the provisions of those laws intentional or unintentional, committed by the entity,
and regulations generally recognized to have a direct or by those charged with governance, by
effect on the determination of material amounts and management or by other individuals working for or
disclosures in the financial statements;
under the direction of the entity, which are contrary
o (b) To perform specified audit procedures (limited) to help
to the prevailing laws or regulations.
identify instances of non-compliance with other laws and
regulations that may have a material effect on the o Non-compliance does not include personal
financial statements; and misconduct unrelated to the business activities of the
o (c) To respond appropriately to identified or suspected entity.
non-compliance with laws and regulations identified
during the audit.
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Responsibility for Compliance with Responsibility for Compliance with

Laws and Regulations Laws and Regulations
Management Auditor o distinguishes the auditor’s responsibilities in relation to
o Ensure that the entity’s o identify material compliance with two different categories of laws and
operations are conducted misstatement of the FS due regulations:
in accordance with the to non-compliance with n The provisions of those laws and regulations generally
provisions of laws and laws and regulations. recognized to have a direct effect on the determination of
regulations material amounts and disclosures in the financial statements
o be not responsible for
such as tax and pension laws and regulations;
preventing non-compliance
and n Other laws and regulations that do not have a direct effect
on the FS, but compliance with which may be fundamental
o cannot be expected to to the operating aspects of the business, to an entity’s
detect non-compliance with ability to continue its business, or to avoid material
all laws and regulations. penalties.
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LEGAL LIABILITY LEGAL LIABILITY

THIRD-
PARTY

AUDITOR CLIENT

STOCKHOLDERS

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Reasonable care and skill, and negligence Negligence

Negligence can be defined as any conduct that is ‘careless
o An auditor has a duty to exercise the reasonable care
and skill expected of a professional. or unintentional in nature and entails a breach of any
o Requires adherence to regulatory and professional contractual duty or duty of care in tort owed to another
standards in all aspects of an audit. person or persons’.
o ‘The professional man owes a duty to exercise that
standard of skill and care appropriate to his professional
status’ (Caparo, 1990).

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Claims for negligence Liability to clients

To be successful in a claim for negligence, a plaintiff must Liability to clients arises both in contract and in the tort of
prove that: negligence. Key cases include:
o duty was owed to the plaintiff by the defendant (duty of o London & General Bank Ltd (1895)
care)
o Kingston Cotton Mill (1896)
o a breach of the duty of care (negligent conduct) occurred
o Thomas Gerrard & Son (1967)
o loss or damage was suffered by the plaintiff
o Pacific Acceptance (1970)
o a causal relationship existed between the breach of duty
by the defendant and the harm suffered by the plaintiff. o Kirby v Centro Properties (2012)

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Pacific Acceptance (1970) Contributory negligence

Auditors’ duties and responsibilities are to:
o Exists where the plaintiff fails to exercise the
n use reasonable care and skill
n check and see for themselves
required standard of care, thus contributing to
n audit the whole year its own loss.
n appropriately supervise and review work of inexperienced staff
n properly document procedures
o Prior to AWA (1995), such a defence by
n rely on satisfactory internal controls auditors was unsuccessful. Refer to Pacific
n warn and inform the appropriate level of management Acceptance (1970).
n take further action where suspicion is aroused
n structure plans and procedures so that discovery
of material error or fraud is reasonably expected
n be guided by professional standards (but not determinative).
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Contributory negligence:
AWA (1995) Liability to third parties

AWA: the company suffered losses due to internal o A number of cases have considered the
control weaknesses over foreign exchange. auditor’s liability in relation to persons other
• Auditor liable for failure to report to board of directors. than the immediate client.
Company found to contribute to loss by officers failing to report to
•
board of directors and failing to put in place adequate internal
o It was believed from early cases (e.g. Donoghue
control system. v Stevenson (1932)) that the recovery of losses
• Defence of contributory negligence therefore upheld. by third parties from auditors for negligence (in
the absence of fraud) was not possible.
Continued

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Liability to third parties (continued) Liability to third parties (continued)

Early test: special relationship Next test: reasonable foreseeability
o A duty is owed to any third party to whom the o A duty is owed to a specific third party of
auditor shows accounts or to whom the auditor whom the auditor was not aware, but who was
knows the client is going to show accounts, so as part of a class of persons who they should
to induce some action. have been aware would rely on their audit
– Candler (1951) (per dissenting judgment of Lord Denning) opinion.
– Hedley Byrne (1963) n Scott Group (1978)
Continued Continued

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Summary of situation:
liability to third parties
Liability to third parties (continued)
Current test: proximity o Decision of the High Court of Australia in Esanda
o Was there a sufficient degree of proximity
is the binding precedent.
between the auditor and third party? To answer this question, courts
examine whether the report by the auditor was meant to induce the
o A general conclusion is that it would be hard to
third party to undertake specific actions. show that audits on general purpose financial
– Caparo (1990) reports were ever intended to induce third parties
– R. Lowe Lippmann Figdor & Franck v AGC (1992) to undertake a specific course of action. (Auditors
– Columbia Coffee (1992) (very wide interpretation,
would strongly argue that this was never the
later overturned in Esanda) intention.)
– Esanda (1997)

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Privity letters
Criminal liability of auditors

o A privity letter is a letter from the auditor o Auditors can be subject to criminal prosecution.
acknowledging a third party’s reliance on an
o Criminal actions against auditors are rare.
audited report. The third party requests the
privity letter from auditor.

o Purpose: to establish a relationship with the

requisite foreseeability and proximity and
thereby establish a duty of care by the auditor to
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Luật kiểm toán độc lập & NĐ 17/2012/NĐ-CP

Điều 29, đoạn 12, Trách nhiệm của công ty kiểm toán - với người sử
dụng kết quả kiểm toán khi người sử dụng kết quả kiểm toán:

a) Có lợi ích liên quan trực tiếp đến kết quả kiểm toán

b) Có hiểu biết một cách hợp lý về báo cáo tài chính và cơ sở lập báo
cáo tài chính là các chuẩn mực kế toán, chế độ kế toán và các quy
Chapter 2
định khác của pháp luật có liên quan;

c) Đã sử dụng một cách thận trọng thông tin . IT’S THE END.

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