What Is an Illegal Act Per Au 317

WHAT IS AN ILLEGAL ACT PER AU 317

Illegal act is the violations of laws or governmental regulations. (Messier, Glover, & Prawitt, 2010, p. 152) AU 317 refers to the differences between illegal acts that have a direct and material effect on a client's financial statements as well material and indirect effects on the financial statements. In order for the auditor to be aware of these two illustrations, the auditor must educate themselves and have a thorough understanding of these acts. The direct affects of illegal acts include items such as tax laws, laws under government contract or indirect affect such as violations of the securities acts, occupational safety and health, food and drug administration, environmental protection, equal employment regulations and price fixing or any other antitrust violations.

FINDING AN ILLEGAL ACT

When an auditor is starting an audit, all of the necessary information is gathered in order to understand the business, its nature, the parties involve and its operations. This information will help the auditor understand how to best plan for the audit, the type of tests necessary to have a successful audit and the type of risks involve as well as the type of illegal acts that may exist in the organization. Very rarely will an employee from an organization inform an auditor that illegal acts are being performed within the company. However, if an auditor come across information of the possibility of illegal acts, they are responsible to comprehend the act in its entirety and gain enough information necessary to evaluate the act and understand the kind of effect such act can have on the financial statement. Following the evaluation, the auditor is liable to notify senior management and its directors about its finding and advise that remedial action is taken. If the auditor feels that management did not provide enough information on the illegal acts found, the auditor ought to do the following per AU 317.

a. "Consult with the client's legal counsel or other specialists about the application of relevant laws and regulations to the circumstances and the possible effects on the financial statements. Arrangements for such consultation with client's legal counsel should be made by the client.

b. Apply additional procedures, if necessary, to obtain further understanding of the nature of the acts."

c. Examine supporting documents, such as invoices, canceled checks, and agreements and compare with accounting records.

d. Confirm significant information concerning the matter with the other party to the transaction or with intermediaries, such as banks or lawyers.

e. Determine whether the transaction has been properly authorized.

f. Consider whether other similar transactions or events may have occurred, and apply procedures to identify them." (Au Section 317) (American Institute of Certified Public Accountants, 2002)

Finding one illegal act within an organization only makes the auditor more suspicious and often thinks of questions such as, could there be any other illegal acts? Therefore the auditor must also carefully analyze the financial statement to make sure that amounts presented in the statements are viable. The auditor should analyze items that pertain to monetary effects such as fines and penalties and loss contingencies such as threat of expropriation of assets etc...The auditor should also take a look at the operations of the entity to see if any material revenue or earnings are consequent from activities that involve illegal acts.

COMMUNICATING THE ILLIGAL ACT

Once the auditor concludes that an illegal act has occurred within the organization, the auditor should consult the audit committee and any other pertinent parties involve, ensure that they are aware of the act and