Question

1. External auditing is a “special function” as described by Chief Justice Warren Burger in a 1984 Supreme Court decision:

“By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public. This “public watchdog” function demands . . . complete fidelity to the public trust.”

1. Auditors serve a number of parties. Which party is the most important?
2. Do you agree with Chief Justice Burger’s characterization of the auditor as a public watchdog?

next qouestion

1. One part of Section 302 of the Sarbanes-Oxley Act states that the CEO and CFO:

Will certify in quarterly and annual reports filed with the SEC that the report does not contain untrue statements of material facts and that the financial statements and disclosures present fairly (in all material respects) the financial condition and results of operations of the issuer.

1. If top management is committing a fraud, do you think that they will refuse to certify the annual reports?
2. What do you think that they will do when faced with that requirement?

Answer 1

ANSWER

PART - A

Auditor is appointed to conduct an independent examination of financial information of any entity with a view to express an opinion on the financial statements.

Auditor serves a number of parties like the management,shareholders,government,employees,public but the auditor's first priority should be the investing public that is those persons who have put their hard earned money in expectation of return on their investment. It is their right to know everything about the affairs of the company and they need to develop a strong faith on the company which is the responsibility of the management to do so and hence for this role the auditor is appointed.So the most important party is the investing public.

PART - B

Supreme court ruled that accounting firm has a ''public watchdog" that transcends loyalty to the clients. I think while supreme court tried to provide with a cognitive bend to the role of auditor but they generalized it by doing so. The term can be used in wide variety of ways. There have been instances where the actual condition is worse off financially than what the auditors tried to indicate but there is a debate over the responsibility of this.when an auditor gives information then what does it imply in terms of health of the entity.some in the profession says that the auditor does not bring too much of help to the investors.it's not just about frauds that has to be dealt with, there are anaytic procedures which tell about competitiveness of the firm.

Hence, it is generally said that auditor is a watchdog but it is very difficult to summarize the whole thing to give a conclusion.

PART-C

Under section 302 of sarbanes oxley act ceo and cfo have to report to sec that financial statments give true and fair view. But it might happen that management is conducting a fraud and it might possibly hesitate to show their financial statements as then it would lead to exposing of their fraud.

But in reality if the management is conducting fraud then they would not hesitate as they would manipulate financial statements in such a way that the fraud would not be visible by the auditors.

PART-D

When they face this requirement then they will use the flaws in the accounting system like accounting assumptions,changes in policies and other things that would help the management in manipulate and alter the accounting records to design in the way the want so that nothing appears fictitious in it.