The Auditor's Approach and Maintenance of the Audit

Auditor has no responsibility for the preparation and fair presentation of financial statements as it lies with the directors of a company. However, an auditor is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error when conducting an audit (MIA, 2010). Considering the inherent limitations of an audit, even though the audit is properly planned and performed there is an unavoidable risk that some material misstatements of the financial statements may not be detected, as of in the case of misstatement resulting from fraud. Fraud may involve carefully organized schemes designed to conceal it yet it may more difficult to detect when accompanied by the collision as it leads the auditor to believe that audit evidence is persuasive when it is not. When obtaining reasonable assurance, the auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures are effective for detecting an error but not fraud (PCAOB, 2019).

As of the Kmart issues, the auditors of Kmart, namely PwC are considered as not liable for the events took place in Kmart. During the investigation by SEC, the reported evidence was insufficient nor persuasive enough to put the blame on PwC in acting negligence (SEC, 2005). Although the duty of care owed by the auditor does present yet the proof in breach of the duty of care are insufficient hence failed to plead any financial loss occurred (). At first, PwC was charged as a defendant with other multiple vendors being accused involved in collusion with Kmart in misleading the accounting practices (i.e. the principle of conservatism and materiality principle)(). Later, the court dismissed all of the claims and charged with prejudice related to the PwC and had brought all the blame to the former CEO of the Kmart (Conaway) and penalty was given to the representatives of Kmart several major vendors (i.e. Kodak, Coca Cola, Pepsi and Frito-Lay) (SEC, 2005).

The penalty given was due to their cautious involvement in the pulling forward of allowances by co-signing false or misleading accounting documents, executing secret side agreements and providing false or misleading third-party confirmations to the company’s independent auditor “PwC” (SEC, 2004). Besides, the misconduct also involved collusion from Kmart officers and in an effort to meet senior management’s earning expectations for their divisions by recognized prematurely of the significant number of allowances on the basis of false information provided to Kmart’s accounting department while the true terms of the payments were set forth in secret side agreements.

Consequently, the PwC ability in detecting the fraud was limit by the skilfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved. Hence, the PwC is not liable in this case. An auditor has a self-interest problem if the outcome of the audit (and/or the success of the company) affects the auditor's (i.e. the audit firm or the auditor as an individual) financial interests. The closeness, in this case, is manifested through the auditor’s share ownership in the client, the client producing a very large part of the audit firm’s audit or other services revenue, or the existence of loans or other financial interests between the auditor and the client. It is a problem for the audit’s value because the auditor knows that a qualified audit report could adversely affect the client’s share price, or a tough audit decision (e.g. requiring the client to write down the value of its assets) could encourage the client to seek another auditor.

These concerns could prompt the auditor to act inappropriately during the audit. An auditor has a self-interest problem if the outcome of the audit (and/or the success of the company) affects the auditor’s (i.e. the audit firm or the auditor as an individual) financial interests. The closeness, in this case, is manifested through the auditor’s share ownership in the client, the client producing a very large part of the audit firm’s audit or other services revenue, or the existence of loans or other financial interests between the auditor and the client.

It is a problem for the audit’s value because the auditor knows that a qualified audit report could adversely affect the client’s share price, or a tough audit decision (e.g. requiring the client to write down the value of its assets) could encourage the client to seek another auditor. These concerns could prompt the auditor to act inappropriately during the audit. An auditor has a self-interest problem if the outcome of the audit (and/or the success of the company) affects the auditor’s (i.e. the audit firm or the auditor as an individual) financial interests. The closeness, in this case, is manifested through the auditor’s share ownership in the client, the client producing a very large part of the audit firm’s audit or other services revenue, or the existence of loans or other financial interests between the auditor and the client.