Question

Compare and contrast the concepts of breach of contract, negligence, gross negligence, and fraud. What does an audit firm need to do to make sure that they aren't accused of any of these?

Answer 1

Ans.

Breach of Contract : It happens when a contracting party fails or refuses to perform its obligation. In case auditor fails to perform his professional services for which the client hired auditor and on which they both agreed upon is comes under breach of contract. So an audit firm has to ensure that to complete all the services agreed upon with client on time so that no such liability will arise.

Negligence:It generally means lack of reasonable care that any person can take. If the auditor fails to use due care and also fail to identify material misstatement and this could harm another person then auditor is at negligence. To make sure that they aren't accused of negligence  Audit firm has to ensure that they were conduct audit with due professional and reasonable care and third party will not suffer any harm or loss because of their decisions and reports.

Gross Negligence : It is a voluntary disregard of the need to use reasonable care, which is likely harm to persons, property, or both. If an auditor fail to comply with generally accepted auditing standards which is but obvious to follow for conducting audit of the client's business this will leads to gross negligence. To make sure that they aren't accused of gross negligence audit firm have to ensure that they will conduct audit as per auditing standards and all the reports issued by them is in accordance with standards.

Fraud : It is intentional deception by a person to secure unfair and unlawful gain. If an auditor intentionally give false representation or conceal any material fact to secure unfair gain or to deceive someone the this will leads to fraud.To make sure that they aren't accused of fraud audit firm have to ensure that they should act independently and ignore all the unlawful gain. If the situation arise where they are not able to give an independent opinion on financial statement then either they would disclaim it or withdraw their engagement with the client. But try to restrict their involvement in the fraudulent activities.