Reportable Irregularities

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Reportable Irregularities Case Example: ABC Manufacturing Company

Context

During the audit of ABC Manufacturing Company, the audit team must remain alert to any evidence or signs of reportable irregularities that could affect the financial statements’ accuracy, disclosures, or the entity’s compliance with laws and regulations.

Audit Objective

To identify and respond to any reportable irregularities encountered during the audit, ensuring that such matters are appropriately communicated to the relevant parties and documented in accordance with auditing standards and legal requirements.

Types of Audit Evidence and Documentation for Reportable Irregularities

1. Identification and Assessment

• Case: Through normal audit procedures, identify signs or evidence of possible irregularities, such as significant unexplained discrepancies in the accounting records, indications of fraud or illegal acts, or significant non-compliance with laws and regulations.

• Documentation: Document the nature of the identified irregularities, how they were discovered, and the steps taken to assess their impact on the audit and the financial statements.

2. Communication with Management and Those Charged with Governance

• Case: Communicate findings related to reportable irregularities to appropriate levels of management and those charged with governance, seeking their insights and response to the findings.

• Documentation: Summarize the communications with management and those charged with governance, including the responses received and any actions they plan to take in response to the irregularities.

3. Determination of Reporting Obligations

• Case: Based on the nature of the irregularities and the jurisdiction in which ABC Manufacturing Company operates, determine the auditor’s obligation to report these findings to external parties, such as regulatory bodies or law enforcement agencies.

• Documentation: Document the legal and professional requirements regarding the reporting of irregularities for the jurisdiction, including any consultations with legal counsel or professional bodies to clarify these obligations.

4. External Reporting of Irregularities

• Case: If required, prepare and submit reports on reportable irregularities to regulatory or law enforcement agencies, in accordance with legal and professional standards.

• Documentation: Keep a record of any reports made to external parties, including the date of reporting, the body to which the report was made, and a summary of the content of the report.

5. Impact on the Auditor’s Report

• Case: Assess the impact of the reportable irregularities on the auditor’s report, considering whether modifications to the auditor’s opinion or an emphasis of matter paragraph is necessary.

• Documentation: Document the auditor’s assessment of the impact of the irregularities on the audit opinion, including any changes to the auditor’s report and the reasoning behind those changes.

6. Consideration of Internal Controls

• Case: Evaluate the effectiveness of the company’s internal control environment in preventing and detecting irregularities, considering whether recommendations for improvements should be communicated to management and those charged with governance.

• Documentation: Summarize the evaluation of the company’s internal controls related to the prevention and detection of irregularities, including recommendations for improvements.

7. Follow-up Actions

• Case: Determine if follow-up actions are required in future audit periods to assess the resolution or mitigation of the reported irregularities.

• Documentation: Outline any planned follow-up actions or procedures for subsequent audits to verify that the company has addressed the reported irregularities.

Conclusion

The detection, documentation, and appropriate response to reportable irregularities are critical components of the audit process. By systematically documenting the identification, assessment, communication, and reporting of irregularities, auditors fulfill their professional and legal responsibilities, contributing to the integrity of the financial reporting process and the overall governance of ABC Manufacturing Company. This documentation also supports the transparency and accountability of the audit process, providing reassurance to stakeholders about the auditors’ diligence and the company’s commitment to rectifying identified issues.