Litigation Exposure in Identifying & Investigating Fraud Risk
In the backlash of fraud and failed auditing, a more stringent standard for auditors was enacted in hopes to avoid the failures of the early 2000s. The Sarbanes-Oxley Act and statements of auditing standards such as SAS 99 were put into place to accomplish this goal. Yet, with more stringent standards comes a heightened public expectation that may increase the potential litigation auditors face. In the world of auditing, a very important aspect that should always concern an auditing firm is the risk of litigation exposure that a firm may encounter in performing an audit. Here, we will look at the guidelines advocated by Statement on Auditing Standard No. 99 in the context of several scenarios to see how the procedures promoted by it may increase the risk of litigation exposure that a firm faces in the event that fraud goes undetected. Statement on Auditing Standard no. 99 requires, as part of planning the audit, that there be a discussion among the audit team members to consider how and where the entity's financial statements might be susceptible to material misstatement due to fraud and to reinforce the importance of adopting an appropriate mindset of professional skepticism. SAS 99 instructs auditors to identify general and specific fraud risks that might be present in a client’s company. While this initial identification of areas where potential fraud risks exist is of great importance for the auditor to reveal actual fraud, taking these actions may actually be detrimental in that they may increase the liability of an auditor being found negligent in cases where fraud goes undetected in spite of the fact that, based on liability laws, taking actions that increase the quality of an audit should reduce liability in the event of an audit failure. Furthermore, as a precursor to further