The detection and reporting of illegal acts by management or other employees is a difficult task. To fulfill their responsibilities, auditors must have a good knowledge of the client’s business, including an understanding of the laws and regulations that govern the business and activities of their clients. In addition, accountants and auditors must be sensitive to factors in the company that may indicate an abnormally high risk of illegal acts by the company or its employees.
Instructions
(a) Identify some examples of illegal acts that may be committed by a company or its employees that, if violated, could reasonably be expected to result in a material misstatement in the financial statements.
(b) Explain how, if at all, an undetected illegal act by a client (for example, paying bribes to secure business, or violating pollution control laws and regulations) could affect the company’s financial statements.
(c) Identify some factors that could indicate that the risk of violation of laws and regulations is greater than normal and that evaluation of note disclosure, or possibly recognition, of an illegal act may be required.