When assessing audit risk, should auditors consider the type and number of third parties that may ultimately rely on the client’s financial statements? Should auditors insist that audit engagement letters identify the third parties to whom the client intends to distribute the audited financial statements? Would this practice eliminate auditors’ legal liability to nonprivity parties not mentioned in engagement letters?
During an audit it is the auditors responsibility to give their opinion on a company’s financial statements to its shareholders. However, the main purpose of the audit is to provide useful and reliable financial statements to investors and creditors. So when the auditor is assessing the audit risk they are assessing the risk on behalf of the investor/creditor according to their interest. The auditors respobsibility is directly to the client when it comes to the engagement and not to the third party in which the client intends to distribute the financial statements to. In the end the auditor only has legal liability towards the client and it would be difficult for an auditor to meet the objectives of all parties involved. Case 7.6 First Securities Company of Chicago
Ernst & Ernst argued that the mail rule was not relevant to its audits of First Securities since that rule only involved personal transactions of Nay and the escrow investors. Do you agree? Why or why not? In my opinion, I believe that the mail rule was relevant to its audits or First Securities. Regardless if the rule only involved personal transactions, Ernst & Ernst were expected to conduct their audit professionally. This would have required them to investigate the mail rule and its purpose. Case 1.12 Madoff Securities
In addition to the reforms mentioned in this case, recommend other financial reporting and auditing-related reforms that would likely be effective in preventing or detecting frauds similar to that perpetrated by Madoff.