Audit Procedures for Auditor's Responsibility for Illegal Acts

Auditors have a responsibility to identify and report illegal acts that may have a material effect on an entity's financial statements during the course of an audit engagement. Illegal acts refer to violations of laws or regulations committed by the entity, including fraud, corruption, bribery, and non$-$compliance with tax laws or environmental regulations. To fulfill their responsibility for detecting illegal acts, auditors employ various audit procedures tailored to identify potential instances of non$-$compliance and assess their impact on the financial statements. Below are some key audit procedures commonly used by auditors to address the responsibility for illegal acts:

Understanding Legal and Regulatory Framework: Auditors begin by gaining a thorough understanding of the legal and regulatory framework applicable to the audited entity's operations. This includes laws, regulations, and industry$-$specific requirements governing the entity's activities, such as financial reporting, taxation, environmental compliance, and labor laws.

Assessing Compliance Risks: Auditors conduct a risk assessment to identify areas of potential non$-$compliance with laws and regulations. This involves evaluating factors such as the entity's industry, geographic location, business activities, and regulatory environment to assess inherent risks of illegal acts.

Evaluating Internal Controls: Auditors assess the design and effectiveness of the entity's internal controls related to compliance with laws and regulations. This includes controls over financial reporting, regulatory compliance processes, monitoring activities, and whistleblower mechanisms to detect and prevent illegal acts.

Performing Legal Compliance Tests: Auditors perform tests of compliance with specific laws and regulations relevant to the entity's operations. This may involve reviewing contracts, agreements, permits, licenses, and other legal documents to ensure compliance with legal requirements.

Reviewing Board Minutes and Resolutions: Auditors review board minutes, resolutions, and other corporate governance documents to identify any discussions or decisions related to legal compliance matters. This helps auditors understand the entity's governance structure and assess management's commitment to compliance.

Conducting Interviews and Inquiries: Auditors conduct interviews and inquiries with management, legal counsel, regulatory authorities, and other relevant parties to gather information about potential illegal acts or instances of non$-$compliance. Effective communication with stakeholders helps auditors uncover insights and corroborate audit evidence.

Performing Analytical Procedures: Auditors perform analytical procedures to identify anomalies or unusual patterns in financial data that may indicate potential illegal acts. This involves comparing financial information with industry benchmarks, historical trends, and expectations based on auditor's expertise.

Evaluating Whistleblower Hotlines: Auditors evaluate the effectiveness of whistleblower hotlines or reporting mechanisms established by the entity to receive complaints or concerns about potential illegal acts. This helps auditors assess the entity's culture of compliance and the responsiveness of management to reported incidents.

Objective Type Question:

During an audit engagement, auditors review board minutes, resolutions, and other corporate governance documents to identify any discussions or decisions related to matters.

A$)$ Financial

B$)$ Compliance

C$)$ Strategic

D$)$ Operational