AU Section 9317
Illegal Acts by Clients: Auditing Interpretations of Section 317
1. Consideration of Internal Control in a Financial Statement Audit and the Foreign Corrupt Practices Act
Question—The second standard of field work requires the auditor to obtain a sufficient understanding of internal control to plan the audit and to determine the nature, timing, and extent of tests to be performed. Is the auditor of an entity subject to the Securities Exchange Act of 1934 required, because of the Foreign Corrupt Practices Act of 1977 and the provisions of section 317, to expand his consideration of internal control beyond that which is required by the second standard of field work?
Interpretation—No. There is nothing in the Act or the related legislative history that purports to alter the auditor's duty to his client or the purpose of his consideration of internal control. The Act creates express new duties only for companies subject to the Securities Exchange Act of 1934, not for auditors.
[Issue Date: October, 1978.]
2. Material Weaknesses in Internal Control and the Foreign Corrupt Practices Act
Question—What course of action should be followed by the auditor of an entity subject to the internal accounting control provision of the Foreign Corrupt Practices Act of 1977 to comply with section 317 when a material weakness in internal control comes to his attention?
Interpretation—The standards applied by an auditor in determining a material weakness in internal control may differ from the standards for determining a violation of the Act. Nevertheless, a specific material weakness may ultimately be determined to be a violation and, hence, an illegal act. Therefore, the auditor should inquire of the client's management and consult with the client's legal counsel as to whether the material weakness is a violation of the Act.
In consultation with management and legal counsel, consideration should be given to corrective action taken or in process. If management has concluded that corrective action for a material weakness is not practicable, consideration should be given to the reasons underlying that conclusion, including management's evaluation of the costs of correction in relation to the expected benefit to be derived. fn 1 If it is determined that there has been a violation of the Act and appropriate consideration is not given to the violation, the auditor should consider withdrawing from the current engagement or dissociating himself from any future relationship with the client (see section 317.22).
A violation of the internal accounting control provision of the Act would not, in and of itself, have a direct effect on amounts presented in audited financial statements. However, the contingent monetary effect on an entity ultimately determined to have willfully violated the internal accounting control provision of the Act could be fines of up to $10,000 for the violation. The auditor should consider the materiality of such contingent monetary effect in relation to the audited financial statements taken as a whole. Other loss contingencies, as defined by FASB Statement No. 5 [AC section C59], ordinarily would not result from a weakness in internal control which gives rise to such a violation of the Act.
[Issue Date: October, 1978.]