Auditor's Role: Watchdog vs. Bloodhound

Aug 6, 2024

Review flashcards

Auditing Class: Auditor as a Watchdog, Not a Bloodhound

Introduction

  • Discussed the objects of auditing in previous classes.
  • Today's topic: Auditor is a watchdog, not a bloodhound.
  • Case study: Kingston Cotton Mills Company (1986).

Case Summary

  • Year: 1986
  • Company: Kingston Cotton Mills
  • Judge: Lopes LJ
  • Statement: Auditor is a watchdog, not a bloodhound.
  • Reason: Defines the duties of an auditor.

Duties of an Auditor

  • Appointed by the company owner or client.
  • Observe transactions honestly.
  • Duties:
    • Find and prevent frauds and mistakes.
    • Check transactions, accounts, final accounts, ledgers, and trial balances.
    • Make notes and report findings to the owner.
    • Write an audit report.
  • Behavior:
    • Neutral and honest.
    • No involvement in conflicts or company politics.

Watchdog vs. Bloodhound

  • Watchdog:
    • Observes and checks transactions and accounts.
    • Alerts owner about frauds and mistakes.
    • Neutral and honest behavior.
    • Example: A dog barking to alert its owner.
  • Bloodhound:
    • Not required to be a detective.
    • No need for in-depth chasing or challenging heroism.
    • Should not enter into disputes or conflicts.

Exam Tips

  • When asked to explain:
    • First paragraph: Explain auditor as a watchdog.
    • Second paragraph: Explain auditor is not a bloodhound.
    • Mention auditor's duties and responsibilities.

Auditor's Responsibilities

  • Detection:
    • Detect errors (mistakes) and frauds (intentional actions).
    • Types of errors and frauds to be familiar with.
  • Prevention:
    • Suggest preventative measures to management.
    • Continuous observation and notation are not enough.

Standard of Auditing 240 (SA 240)

  • Responsibilities:
    • Relating to fraud in the audit of financial statements.
    • Minimum responsibility: Inform client about frauds.
    • Identify department and person responsible for fraud.
    • Inform client, but avoid personal conflicts or revenge.

Conclusion

  • Auditor is a watchdog, not a bloodhound.
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