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A major focus of the lawsuit Chevron Chemical filed against Touche Ross was the auditing profession’s rules regarding the “subsequent discovery of facts existing at the date of the auditor’s report”. Those rules distinguish between situations in which a client cooperates with the auditor in making all necessary disclosures and situations involving uncooperative clients. Briefly summarize the differing responsibilities that auditors have in those two sets of circumstances. Answer:
International Standard of Auditing (ISA) Section 560 Subsequent Events paragraph 15 defined that “Subsequent discovery of facts existing at the date of the auditor’s report” is where the condition when after the financial statements have been issued, the auditor becomes aware of a fact which existed at the date of the auditor’s report and which if known at that date, may have caused the auditor to modify the auditor’s report, the auditor should consider whether the financial statements need revision, should discuss the matter with management, and should take the action appropriate n the circumstances.
The subsequent discovery of facts requiring the recall or re- issuance of financial statements does not arise from business events occurring after the date of auditor’s report.
While a number of situations may apply, the most common situation is where the previously financial statements contain material misstatements due to either unintentional or intentional actions by management.
When facts are encountered that may affect the auditor’s previously issued report, the auditor should consult with his/her attorney because legal implications may be nvolved and actions taken by the auditor may involve confidential client-auditor communications. The auditor should determine whether the facts are reliable and whether they existed at the date of the audit report. The auditor should discuss the matter with an appropriate level of management and request cooperation in investigating the potential misstatement. Messier, Jr. , W. , Glover, S. M. ; Prawitt, D. F. 2008) If the auditor determines that the previously issued financial statements are in error and the audit report is affected, he/she should request that the client ssue an immediate revision to the financial statements and auditor’s report. The reasons for the revisions should be described in the footnotes to the revised financial statement. (Messier, Jr. , W. , Glover, S. M. & Prawitt, D. F. 2008).
ISA Section 560 paragraph 16 further explained the responsibilities of the auditors in the situation when a client cooperates with the auditor in making all necessary disclosures. It stated that when management revises the financial statements, the auditor would carry out the audit procedures necessary in the circumstances, would review the teps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation and would issue a new report on the revised financial statements.
ISA Section 560 paragraph 17 highlighted that the new auditor’s report should include an emphasis of a matter paragraph referring to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial statements and to the earlier report issued by the auditor. The new financial statements.
If the client refuses to cooperate and make the necessary disclosures, the auditor should notify the board of directors and take the following steps, if possible: * Notify the client that the auditor’s report must no longer be associated with the financial statements * Notify any regulatory agencies having jurisdiction over the client that the auditor’s report can no longer be relied upon. * Notify each person known to the auditor to be relying on the financial statements. Notifying a regulatory agency such as the SEC is often the only practical way of providing appropriate disclosure. (Messier, Jr. , W.
Glover, S. M. & Prawitt, D. F. 2008) The opinion of the above author also supported by ISA Section 560 paragraphs 18. It stated that when management does not take the necessary steps to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation and does not revise the financial statements in circumstances where the auditor believes they need to be revised, the auditor would notify those charged with governance of the entity that action will be taken by the auditor to prevent future reliance on the auditor’s report.
The action taken will depend on the auditor’s legal rights and obligations and recommendations of the auditor’s lawyers. 2. Given your previous answer, do you believe that Touche Ross complied with the applicable professional standards after learning of the error in AES’s 1985 financial statements? Explain. Answer: Based on the previous answer, I believed that Touche Ross did not comply with the applicable professional standards which are International Standard of Auditing (ISA) 560.
When the personnel of Touche Ross discovered that the AFS’s 1985 financial tatements contained a material misstatement, they attempted to persuade AFS to recall the company’s 1985 financial statements. But, unfortunately AFS officials declined to recall those financial statements. At last, AFS and Touch Ross come out with a compromise. This compromise permitted Touch Ross to only notify AFS’s sole secured creditor that the firm’s audit opinion on AES’s 1985 financial statements had been withdrawn but could not notify AES’s unsecured creditors included Chevron Chemical.
The compromise that made by the Touche Ross with AFS have violated the ISA Section 560 paragraph 18. They should not only notify some of the AFS creditors. On the contrary, they should comply with the standard that required them to notify those charged with governance of the company or each person known to the auditor to be relying on the financial statement that action will be taken by the auditors to prevent future reliance on the auditor’s report.
On top of that, Chevron Chemical Company is the largest suppliers of AFS and it will rely on the erroneous financial statement in deciding to continue extending credit to the company. So, the Touche Ross has the responsibility to inform Chevron Chemical Company of the material misstatement in the financial statement 1985. As a result, Chevron Chemical Company sued the Touche Ross and the court ruled that Touche Ross was negligent as a matter of law in failing to notify Chevron Chemical Company of the withdrawal of their opinion. iolated the profession’s client confidentiality rule by withdrawing its 1985 audit opinion and notifying all relevant third parties of the decision? Why or why not? Answer: No, I don’t agree with the assertion of AFS’s legal counsel that Touche Ross would ave violated the profession’s client confidentiality rule by withdrawing its 1985 audit opinion and notifying all relevant third parties of the decision. First of all, we look at the definition of confidentiality.
By-laws (On Professional Ethics, Conduct and Practice) of Malaysian Institute of Accountants Section 100 Fundamental Principles and Conceptual Framework stated that a professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without roper and specific authority unless there is a legal or professional right or duty to disclose.
Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the professional accountant or third parties. MIA By-laws Section 140 Confidentiality paragraph 0. 7 further explained about the concept of legal or professional right or duty to disclose the confidential information.
It highlighted that the disclosure of the confidential information may be appropriate if there is a professional duty or right to disclose hen not prohibited by law: * To comply with the quality assurance or practice review program of the Institute * To respond to an inquiry or investigation by the Institute’s Investigation Committee or Disciplinary Committee or any other regulatory body * To protect the professional interests ofa professional accountant in legal proceedings * To comply with technical standards and ethics requirements As stated in the case of Fischer vs.
Kletz, the responsibility to correct an audit report that was incorrect at the time of issuance is a legal as well as a professional obligation. (Cashell, J. D. Fuerman, R. D. ) In my opinion, Touche Ross has the professional duty or right to withdraw their audit opinion and notify third parties of that their opinion had been withdrawn to comply with the requirements of the professional ethics and conduct. Interests of all parties including the third parties like Chevron Chemical Company will be harmed if Touche Ross does not disclose the material misstatement of AFS to the public.
It is because the third parties will continue to rely on the erroneous financial statement to make their financial decisions such as extending credits or approving the loans to AFS. On top of that, if Touche Ross resisted disclosing, then there will be a legal obligation towards the Touche Ross on negligence in failing to notify the third parties of the withdrawal of their opinion. I would like to support my opinion with a case. The case Fund of Funds Ltd vs.
Arthur Andersen ; Co is an example of a case where the CPA was deemed to have had a duty to disclose. Arthur Andersen ; Co (AA) was the auditor for two clients, Fund of Funds Ltd (FF) and King Resources Corp. (KRC). KRC developed natural resource properties and agreed to be the sole vendor of such properties to FF at rices no higher than those charged KRS’s industrial clients. AA learned the agreement was not being met but failed to inform FF.
The court ruled AA should have disclosed this fact to FF because 1) they had knowledge of the overcharges, 2) they their engagement letter produced a contractual obligation to reveal such information. (Cashell, J. D. , Fuerman, R. D. ) This case proved that auditors got the obligation to disclose fraud or any misstatement to the outsiders. 4. Suppose that Touche Ross had resigned as AES’s auditor following the completion of the 1985 audit but prior to the discovery of the error in the 1985 financial tatements.
What responsibility, if any, would Touche Ross have had when it learned of the error in AES’s 1985 financial statements? Answer: According to the AU section 9561 Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report: Auditing Interpretations of Section 561, it required that the auditor to undertake to determine whether the information is reliable and whether the facts existed at the date of his report.
This undertaking must be performed even when the auditor has resigned or been discharged. Hence, when Touche Ross had learned of the error in AFS’s 1985 financial tatements, it still has its own responsibility to investigate its reliability and whether it existed at the date of the report although it had resigned as AFS’s auditor following the completion of the 1985 audit.
If the investigation finds the financial statements or report would have been affected by the error if known earlier and it is believed there are persons currently relying or likely to rely on the financial statements who would attach importance to the information, the auditor who have resigned should also advise the client to make appropriate disclosure of the newly discovered facts. The responsibilities of the resigned auditors in the situations in which a client cooperates with the auditors in making all necessary disclosures and situations involving uncooperative clients are totally the same with the continuing auditor.
