Final answer:
The auditor should communicate their findings and reasons for withdrawing from an audit engagement to the company's governance, following a structured format akin to a formal business letter. This communication must detail the nature of the fraud, its impact, and highlight the necessity of the auditor's withdrawal.
Step-by-step explanation:
When an auditor has discovered fraud that materially affects a company's financial statements, the ethical and professional requirements dictate that the reason for withdrawal and findings must be communicated effectively, typically to those charged with governance, such as the audit committee or board of directors. In the United States, for instance, standards set by bodies such as the Public Company Accounting Oversight Board (PCAOB) provide guidance on such matters.
It is essential that the communication is made in a formal, clear, and comprehensive manner, which can include drafting a formal letter to the company's board of directors or audit committee. The contents of this communication should detail the nature of the fraud, the potential impact on the financial statements, and the reason why the auditor is unable to complete the engagement.
An effective correspondence would follow a structured format, similar to those used in formal business letters:
- The first paragraph should clearly state the purpose of the letter, that is, to inform about the auditor's withdrawal and the reasons for this action.
- The following paragraphs would provide the relevant details regarding the auditor's findings, emphasizing how the discovered fraud could materially affect the financial statements and the implications of such a finding.
- The final paragraph would reiterate the serious nature of the findings, the necessity of withdrawing from the engagement, and may also suggest the need for further investigation by the company.
Transparency in such communications ensures that the company can take appropriate actions to investigate the fraud, correct the financial statements, and inform shareholders and the public as necessary, in alignment with statutes and regulations directed at maintaining public trust in financial reporting.