Question

question 9

(TCO D) You are a CPA. You worked 2 years for a CPA firm doing audits and now you have just completed your first year in your own CPA firm. Your physician audit client, whom you just issued an unqualified opinion, has just determined that his accountant has been stealing about $300,000 per year from their physician medical practice, which you failed to detect during your audit. You had warned the managing partner that they did not have adequate internal controls. Are you liable? Explain your defense and possible legal liability.

Answer 1

Establishing and maintaining the adequate control environment is the responsibility of the management of the firm. Therefore, management will be liable for any discrepancy in the internal control system.

The auditor during the audit of the firm evaluates the system of internal controls and make recommendations for improvements in the system. He is not liable for any loss due to weakness of internal control system of the firm provided, he has performed his role with due care and has taken all reasonable steps in order to find discrepancy. As in the present case, Auditor has warned the managing partner that they did not have adequate internal controls.

Thus, As the auditor of the firm, I am not liable for the theft of $300,000 per year by the accountant as I have warned the management for their poor internal control.