Two Auditor liability is increasingly concerning, both in terms of audit quality and the reputation of the profession but also in terms of the cost to the industry and the barriers this creates to competition within the audit market. The Securities and Exchange Commission (SEC), the primary regulatory body that oversees the operations of the financial markets, requires that publicly-traded companies be subject to an annual audit – a set of procedures designed to determine whether a firm’s financial statements fairly comply with generally accepted accounting principles (GAAP). When performing audits, auditors use generally accepted Major Topic VERIFICATION OF BALANCE SHEET ITEMS Blooms Designation AP Score 8 Major Topic AUDITORS LIABILITY Blooms Designation AP Score 6 3 auditing standards (GAAS) as guidelines in determining the amount of evidence to gather and to what degree the client’s accounting system may be relied upon. Since investors and their advisors rely on audited financial statements to make investment decisions, auditors have a significant impact on the financial community and capital markets. Accordingly, auditors must be diligent in the execution of their duties. However, notwithstanding the high level of care exercised by most auditors, sometimes misleading or erroneous information is released to the investing public (Gormley et al., 2003).

a) Discuss the position of the independent auditor if he comes across any unlawful act committed by his client in the course of the audit exercise.

b) The question of liability to third parties for financial injury arising from negligence on the part of the auditor has been confused for many years, mainly due to a series of conflicting legal decisions. Discuss

c) Discuss how the independent auditor may ensure quality of audit work.