Case 1.7 Lincoln Savings and Loan
The responsibility of the auditor is to first notify their client of this discovery. The auditor should also inform their supervisor and ensure that the transaction and any communication is fully documented. The client should then be notified that the entry should be adjusted to reflect the true outcome. If the client refuses to make this adjustment or provide a sufficient explanation as to why the will not make the change, the auditing firm has a responsibility to themselves and the stakeholders of that company to withdraw from the engagement.
3) An auditor’s examination is affected when a client has engaged in significant related party transactions due to the increased risk of fraud. SAS 45 which supersedes SAS 6 is the source of AU section 334 which discusses “related parties”. This section provides a guideline for auditors to follow so that they are satisfied with the relationship and its adherence to GAAP. Although, “FASB Statement No. 57, Related Party Disclosures [AC section R36], gives the requirements for related party disclosures”, it cannot be assumed that all related party transactions will be