The Responsibility of the External Auditor and the Management of the Entity Being Audited with Relation Fraud and Error.

Topics: Auditing, Audit, Enron Pages: 5 (1575 words) Published: December 29, 2011
Assignment number :01
Course code: HONOUDK
Student number: 36894206
The responsibility of the external auditor and the management of the entity being audited with relation fraud and error. 1.Introduction
Fraud is defined as something that is intended to deceive people and error is defined as something unintentionally done wrong, e.g. as a result of poor judgment or lack of care by Encarta English Dictionary. After the collapse of great companies like Enron, and World com to mention a few, it has raised eyebrows the involvement of auditors in these failed companies and have put the importance of effective corporate governance in the spotlight. It was well documented fact that Arthur Anderson the auditors were involved in the Enron debacle which led to its dissolution as one five largest accounting firms in the world. The responsibility of auditors in the above mentioned example was massively undermined, on June 15.2002 Arthur Andersen was convicted of obstruction of justice for shredding documents relating to its audit of Enron. Even though the Supreme Court of the United States unanimously overturned Andersen’s conviction due to flaws in the jury instructions, Andersen has not returned as a viable business even on a limited scale, there are over 100 civil suits pending against the firm related to its audits of Enron and other companies. It began winding down its American operations after the indictment. The management of Enron also was not responsible and careful enough in handling their operations as a result of the fraud at Enron shareholders lost tens of thousands of billions of dollars and many Enron executives were indicted. Therefore this is a very serious issue that both management and auditors must not overlook but show great willingness in tackling it. I believe that normally management takes great care in preparing financial statements and in making sure that the financial statements are free of material error in all respects. Despite what I have mentioned human beings do make errors from time to time in executing their duties. It is against this background that both auditors and management have the responsibility not to overlook the errors and also regarding the management to have sufficient control to prevent and to detect errors. My view concerning what I have mentioned above is that management and external auditors, and other stakeholders such as internal audit, audit committee ,employees ,suppliers, consumers and investors are all affected when there is fraud and error in the financial statements and in the entity as a whole. The following paragraphs provide an overview of the responsibilities of both auditors and management with relation to fraud and error.

Assignment number :01
Course code: HONOUDK
Student number: 36894206
2. The responsibility of the external auditor and the management of the entity being audited with relation fraud and error. 2.1 The responsibility of external auditors
According to The South African Institute of Chartered Accountants ISA 240.(2008:6-7) the auditors should be able to obtain reasonable assurance that the financial statements being audited by them are free of any material misstatements whether caused by commission of fraud or error. The auditor should always maintain an attitude of professional skepticism throughout the audit. The responsibility of external auditors has become more important since the indictment of Arthur Andersen and it ’s perceived failure to uncover material financial misstatements in the financial statements. External auditors need to be bold and unbiased when in their audits they identify red flags that may show that fraud might have been committed. While it may be difficult in some instances to detect fraud or error because of inherent limitations of an audit, the onus is on the auditor to strive to apply ISA 240 to the best if his ability and to use his skills, experience, and judgment when conducting the audit. According to Arens,...
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