The external auditor’s responsibilities with respect to illegal acts

Jul 30, 2021
Audit Financial reporting PCAOB matters

The Center for Audit Quality (CAQ) recently published an overview of the external auditor’s responsibilities with respect to illegal acts under Public Company Accounting Oversight Board (PCAOB) auditing standards. The publication also explores how the auditor’s responsibility to identify and detect a material financial statement misstatement due to fraud differs from the auditor’s responsibilities related to illegal acts.

Illegal Acts: The External Auditor’s Responsibilities discusses that, under PCAOB standards, an audit normally does not include audit procedures specifically designed to detect illegal acts. However, procedures (e.g., reading board minutes, inquiring of management’s legal counsel concerning litigation and performing testing of financial statement account balances) applied for the purpose of forming an opinion on the financial statements may bring possible illegal acts to the auditor’s attention. Absent specific information concerning possible illegal acts about which the auditor becomes aware, the auditor is not required to perform further audit procedures related to possible illegal acts under PCAOB auditing standards.

If the auditor becomes aware of information concerning a possible illegal act, the auditor is required to obtain an understanding of the nature of the act, the circumstances in which it occurred, and sufficient other information to evaluate the effect on the financial statements, if any. As further discussed in the CAQ’s publication, the auditor’s assessment of the potential impact of the illegal act(s) on the financial statements affects the procedures the auditor may need to perform related to the possible illegal act.