Despite all the potential for lawsuits against auditors, many lawsuits by third parties are unjustified. For example, if a third party sues the auditor because the client (i.e., the company being audited) is no longer a viable company, that is not justified, because the auditor is not responsible for making sure that the company is viable and can continue operating in the long-term. The auditor is solely responsible for making sure that the financial statements are presented fairly against the appropriate evaluation criteria. In addition, unjustified lawsuits also may involve the phenomenon of audit risk.

Audit risk is the risk that an auditor does everything correctly/to the best of his/her ability, but May still express an inappropriate audit opinion on the financial statements. Essentially, the situation deals with errors in financial statements that can remain even after the auditor has followed the auditing rules provided by the governing body. There are simply bad luck situations when an auditor, for example, decides to pick a sample to audit which is not representative of the entire population of data. The errors originate from unfortunate situations and are not the auditors responsibility. If, however, an auditor were not to comply with the general auditing standards outlined by the governing accounting body, that would be a justified reason for a lawsuit, a situation called audit failure.

Required

a) Discuss the ethical principles that the auditor must subscribe

b) Discuss why expectation gap may have resulted in various unjustified litigation against the auditor

c) Briefly explain the causes of audit risk

d) Evaluate the best measure that the auditor can use to mitigate the auditor liability

e) Evaluate the differences between an auditor liability in case of audit of financial statements engagement and engagement to review forecasted financial statements