Final answer:
The auditing standards require auditors to distinguish between illegal acts with direct and material effects and those with indirect and immaterial effects on the financial statements. Direct and material illegal acts can significantly misrepresent financial information, impacting financial reports. Indirect and immaterial acts might not significantly affect financial statements but still need to be communicated to management.
Step-by-step explanation:
Auditing standards distinguish between illegal acts that have direct and material effects on the financial statements and those that have indirect but immaterial effects. When an auditor encounters illegal acts, they must assess the implications on the financial statements. Acts with a direct and material effect could significantly misrepresent the financial information, leading to a misstated financial report. This would require the auditor to take necessary action, including ensuring the act is properly reflected in the financial statements and disclosed according to the relevant financial reporting framework.
On the other hand, illegal acts that are indirect and immaterial might not require the same level of disclosure or adjustment in the financial statements but may still need to be communicated to the appropriate level of management or those charged with governance.