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Auditing: Difference between direct indirect effect illegal acts

"Auditor's responsibility to uncover illegal acts depends on direct effect or indirect effect..." What is the difference between direct effect and indirect effect illegal acts? How do these acts differ from fraud? What is the auditor's responsibility in detecting and reporting these acts?

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Bostick & Luehlfing (2007) provide that SAS 54 classifies illegal acts conducted by companies into direct effect or indirect effect illegal acts. Direct effect illegal acts affect financial and accounting aspects of an organization. Direct illegal acts can be termed as violations of laws and regulations that affect specific account balances in an organization's financial records. Examples of direct illegal acts include violations of regulations that affect the amount of revenue accrued in a contract or violating tax laws thus affecting the amount reflected as expense in financial records.

Indirect illegal acts have an indirect effect on a company's financial statements. Neebes et al (1991) provide that indirect illegal acts are characterized as being related to an organization's operating aspects more compared to its financial and accounting aspects. This type of acts affects financial statements ...

Solution Summary

The differences between direct indirect effects legal acts in auditing are examined.

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