Question

Under SAS 99, financial statement auditors are required to make inquires of all but which of the following individuals or groups about possible fraudulent activity or red flags?

1) Management
2) Audit committee
3) Internal auditors
4) External auditors

Answer 1

Under SAS 99, auditors do not need to inquire about fraud with other external auditors. They should consult with management, audit committees, and internal auditors. A robust corporate governance structure is crucial for preventing failures like those seen in the Lehman Brothers case.

Step-by-step explanation:

Under SAS 99, financial statement auditors are required to make inquiries about possible fraudulent activity or red flags with several groups involved in the corporate governance structure. These groups typically include management, the company's audit committee, and internal auditors. However, auditors are not required to make these inquiries with external auditors as they themselves are the external auditors performing the financial statement audit.

Corporate governance's first line of defense is the board of directors, followed by the hiring of an auditing firm to review the company's financial records. Outside investors, such as those managing large mutual or pension funds, serve as another institution of governance. Failures in corporate governance, like in the case of Lehman Brothers, can result in inaccurate financial information being provided to investors.