Discussants' Response No. 1 to
"Illegal Acts: What is The Auditor's Responsibility?"
Editor's Note: As mentioned in the preface, we have two discussants' responses for this paper. The first response represents the comments by three students from the accounting program at the University of Kansas. These students were selected as the 1990 Deloitte & Touche Symposium Fellows. The other response is the usual academician's remarks by Professor McNair, Mississippi State University. The two responses are given below in the order they were presented.
Tim Damewood Susan Harshberger Russ Jones
University of Kansas
Our objective in critiquing the paper by Mr. Guy, Mr. Whittington and Mr. Neebes is to find ways of improving SAS 54 [AICPA, 1988]. Our com-ments will deal with issues related not only to reducing ambiguities in the interpretation and implementation of the SAS by different auditing firms but also with expanding the scope of SAS 54 to other issues that have not been considered by the profession. Our discussion will be directed towards SAS 54 because much of the paper is a restatement of the SAS. We will address the following issues in our paper:
• The distinction between direct and indirect illegal acts.
• The auditor's competence in detecting illegal acts.
• SAS 54's "if necessary" clause.
• Auditor's neutrality towards industry in detecting illegal acts.
• Qualitative materiality.
• Auditor's responsibility towards communicating audit findings.
The first issue is direct versus indirect illegal acts. In order to accomplish the objective of consistent application of the SAS, there needs to be a more clear distinction between direct and indirect illegal acts within the SAS. In the case of direct effect illegal acts, the auditor is responsible for designing the audit to provide reasonable assurance that the financial statement amounts are free from material misstatement resulting from such acts. However, in the case of indirect effect illegal acts, the auditor is responsible for the de-tection of such acts only when information comes to his or her attention con-cerning their possible existence. The last sentence of paragraph seven of SAS 54 more clearly states the auditor's responsibilities for indirect illegal acts: