Illegal Acts by Clients

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February 14, 2011Neckuscha L.M. Caputo
Illegal Acts by Clients: AU Section 317 (SAS no. 54)

An auditor has two distinct responsibilities regarding illegal acts. First, an auditor must thoroughly understand all existing accepted auditing standards to be equipped to recognize the potential for illegal acts. Once an auditor has uncovered the potential for such violations then it is equally prudent to understand the personal responsibilities an auditor must bear and the necessary actions that accompany an irregular audit.

The government has well intentioned regulations enacted to protect individuals and organizations from an action or an omission that violates or influences the material reliability of a financial statement or audit. Illegal acts committed by clients must segregate activities that do not include the entity that is having their financial statements audited. Equally, illegal acts also include the acts of management or individuals that act in the interest of the aforementioned entity.

Although the responsibility to recognize illegal acts is important to the auditor, it is not the burden of an independent auditor to determine culpability or render judgment. Again, an auditor is likely the most qualified individual to recognize something unconventional due to their intimate understanding of their own client and experience in that particular industry. With that being said, it is the ultimate responsibility of a qualified lawyer or the appropriate court of law to determine if such findings are in fact illegal acts and punishable by law.

Illegal acts can be well concealed if they are associated with activities that stray from the norm of financial statements. An auditor would be less likely to discover an activity that would generally not find its way onto a financial statement in the first place. An auditor also understands the laws associated with financial statements in the context of the intention of a particular audit. Illegal acts...
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