Reed, CPA, accepted an engagement to audit the financial statements of Smith Company. Reed’s discussions with Smith’s new management and the predecessor auditor indicated the possibility that Smith’s financial statements may be misstated due to the possible occurrence of errors, fraud, and illegal acts. a. Identify and describe Reed’s responsibilities to detect Smith’s errors and fraud. Do not identify specific audit procedures. b. Identify and describe Reed’s responsibility to report Smith’s errors and fraud.

a. Reed’s responsibility to detect fraud is the same as his responsibility to detect any unintentional errors to the extent that they are material and have a direct effect on Smith’s financial statements. These responsibilities entail performing a fraud risk assessment and performing the audit with due professional care & skepticism (Boynton & Johnson, 2006, pp. 57-58). As an auditor, the responsibility for specifically detecting material misstatement due to fraud was expanded by SAS 99, but there still remains an expectation gap between what an auditor currently does do and should do (Zikmund, 2007, p. 31). b. The next question that arises is what responsibilities exist in regards to an error or fraud that was detected. Reed’s first and most basic responsibility is to communicate the detection to management. If the issue related to a fraud, then it should be communicated to at least one level higher than the fraud that occurred. If the fraud was perpetrated by senior management and caused a material misstatement, then Reed would need to report it directly to the audit committee or board of