What are auditors required to inform management about regarding illegal acts?

Auditors are required to inform management about illegal acts as soon as practicable because timely communication is essential in addressing any potential issues effectively. This requirement ensures that management is immediately made aware of any unlawful activities that could have significant implications for the organization or its financial reporting. By doing so, management can take appropriate actions to rectify the situation, implement controls, or make necessary disclosures to stakeholders.

The principle behind this requirement is to promote transparency and prompt action, which can help mitigate further risk and potential harm that might arise from the illegal acts. Auditors play a crucial role in the governance structure of an organization and their prompt notification can facilitate corrective measures that might prevent escalation or ongoing risks.

In contrast, materiality, timing, and substantiation criteria can lead to delays or omissions in reporting, which ultimately could hinder management’s ability to respond effectively to issues that may have serious impacts on the organization’s reputation, financial stability, and compliance with laws and regulations.