AAA – L3 – SA – Q5.3 – Professional responsibility and liability

What should an auditor do upon suspecting fraudulent activity by a director?

Question

An audit engagement partner suspects that a director of a client company has been carrying out fraudulent activity. What would be the most appropriate immediate course of action?

A Challenge the suspected individual

B Report the suspicions to the audit committee of the client company

C Report the suspicions to the chairman of the board of the client company

D Seek legal advice

Answer

Explanation: Seeking legal advice (D) is the most appropriate immediate action to determine the auditor’s legal obligations, such as reporting requirements, and to avoid potential liability. Challenging the individual (A) risks escalating the situation prematurely. Reporting to the audit committee (B) or chairman (C) may be appropriate later, but legal advice ensures compliance with laws and professional standards first.

Tags: Audit committee, Auditor Response, Fraud suspicion, Governance, Legal advice
Level: Level 3

Topic: Professional responsibility and liability

Uploader: Salamat Hamid