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defined that ³Subsequent discovery of facts existing at the date of the auditor¶s report´ is where
the condition when after the financial statements have been issued, the auditor becomes aware
of a fact which existed at the date of the auditor¶s report and which if known at that date, may
have caused the auditor to modify the auditor¶s report, the auditor should consider whether the
financial statements need revision, should discuss the matter with management, and should
take the action appropriate in the circumstances. The subsequent discovery of facts requiring
the recall or re-issuance of financial statements does not arise from business events occurring
after the date of auditor¶s report. While a number of situations may apply, the most common
situation is where the previously financial statements contain material misstatements due to
either unintentional or intentional actions by management.

When facts are encountered that may affect the auditor¶s previously issued report, the
auditor should consult with his/her attorney because legal implications may be involved and
actions taken by the auditor may involve confidential client-auditor communications. The auditor
should determine whether the facts are reliable and whether they existed at the date of the audit
report. The auditor should discuss the matter with an appropriate level of management and
request cooperation in investigating the potential misstatement. (Messier, Jr., W., Glover, S. M.
& Prawitt, D. F. 2008)

If the auditor determines that the previously issued financial statements are in error and
the audit report is affected, he/she should request that the client issue an immediate revision to
the financial statements and auditor¶s report. The reasons for the revisions should be described
in the footnotes to the revised financial statement. (Messier, Jr., W., Glover, S. M. & Prawitt, D.
F. 2008). Æ
*+,  + further explained the responsibilities of the auditors in
the situation when a client cooperates with the auditor in making all necessary disclosures. It
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stated that when management revises the financial statements, the auditor would carry out the
audit procedures necessary in the circumstances, would review the steps taken by management
to ensure that anyone in receipt of the previously issued financial statements together with the
auditor¶s report thereon is informed of the situation and would issue a new report on the revised
financial statements. Æ 
 *+,   - highlighted that the new auditor¶s report
should include an emphasis of a matter paragraph referring to a note to the financial statements
that more extensively discusses the reason for the revision of the previously issued financial
statements and to the earlier report issued by the auditor. The new auditor¶s report would be
dated not earlier than the date of approval of the revised financial statements.

If the client refuses to cooperate and make the necessary disclosures, the auditor should
notify the board of directors and take the following steps, if possible:

Ú Notify the client that the auditor¶s report must no longer be associated with the financial
statements
Ú Notify any regulatory agencies having jurisdiction over the client that the auditor¶s report
can no longer be relied upon.
Ú Notify each person known to the auditor to be relying on the financial statements.
Notifying a regulatory agency such as the SEC is often the only practical way of
providing appropriate disclosure.
(Messier, Jr., W., Glover, S. M. & Prawitt, D. F. 2008)

The opinion of the above author also supported by Æ
*+,  .. It
stated that when management does not take the necessary steps to ensure that anyone in
receipt of the previously issued financial statements together with the auditor¶s report thereon is
informed of the situation and does not revise the financial statements in circumstances where
the auditor believes they need to be revised, the auditor would notify those charged with
governance of the entity that action will be taken by the auditor to prevent future reliance on the
auditor¶s report. The action taken will depend on the auditor¶s legal rights and obligations and
recommendations of the auditor¶s lawyers.
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ëased on the previous answer, I believed that Touche Ross did not comply with the applicable
professional standards which are 

   Æ  (Æ) *+, When the
personnel of Touche Ross discovered that the AFS¶s 1985 financial statements contained a
material misstatement, they attempted to persuade AFS to recall the company¶s 1985 financial
statements. ëut, unfortunately AFS officials declined to recall those financial statements. At last,
AFS and Touch Ross come out with a compromise. This compromise permitted Touch Ross to
only notify AFS¶s sole secured creditor that the firm¶s audit opinion on AFS¶s 1985 financial
statements had been withdrawn but could not notify AFS¶s unsecured creditors included
Chevron Chemical.

The compromise that made by the Touche Ross with AFS have violated the Æ

 *+,   .. They should not only notify some of the AFS creditors. On the
contrary, they should comply with the standard that required them to notify those charged with
governance of the company or each person known to the auditor to be relying on the financial
statement that action will be taken by the auditors to prevent future reliance on the auditor¶s
report. On top of that, Chevron Chemical Company is the largest suppliers of AFS and it will rely
on the erroneous financial statement in deciding to continue extending credit to the company.
So, the Touche Ross has the responsibility to inform Chevron Chemical Company of the
material misstatement in the financial statement 1985. As a result, Chevron Chemical Company
sued the Touche Ross and the court ruled that Touche Ross was negligent as a matter of law in
failing to notify Chevron Chemical Company of the withdrawal of their opinion.


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No, I don¶t agree with the assertion of AFS¶s legal counsel that Touche Ross would have
violated the profession¶s client confidentiality rule by withdrawing its 1985 audit opinion and
notifying all relevant third parties of the decision. First of all, we look at the definition of
confidentiality. &6
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stated that a professional accountant should respect the confidentiality of information acquired
as a result of professional and business relationships and should not disclose any such
information to third parties without proper and specific authority unless there is a legal or
professional right or duty to disclose. Confidential information acquired as a result of
professional and business relationships should not be used for the personal advantage of the
professional accountant or third parties. 9Æ&6

:,    
,- further explained about the concept of legal or professional right or duty to disclose the
confidential information. It highlighted that the disclosure of the confidential information may be
appropriate if there is a professional duty or right to disclose when not prohibited by law:

Ú To comply with the quality assurance or practice review program of the Institute
Ú To respond to an inquiry or investigation by the Institute¶s Investigation Committee or
Disciplinary Committee or any other regulatory body
Ú To protect the professional interests of a professional accountant in legal proceedings
Ú To comply with technical standards and ethics requirements

As stated in the case of P


, the responsibility to correct an audit report
that was incorrect at the time of issuance is a legal as well as a professional obligation.
(Cashell, J.D., Fuerman, R.D.) In my opinion, Touche Ross has the professional duty or right to
withdraw their audit opinion and notify third parties of that their opinion had been withdrawn to
comply with the requirements of the professional ethics and conduct. Interests of all parties
including the third parties like Chevron Chemical Company will be harmed if Touche Ross does
not disclose the material misstatement of AFS to the public. It is because the third parties will
continue to rely on the erroneous financial statement to make their financial decisions such as
extending credits or approving the loans to AFS. On top of that, if Touche Ross resisted
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disclosing, then there will be a legal obligation towards the Touche Ross on negligence in failing
to notify the third parties of the withdrawal of their opinion.
I would like to support my opinion with a case. The case P P 


Æ 
Æ 
  is an example of a case where the CPA was deemed to have had a duty to
disclose. Arthur Andersen & Co (AA) was the auditor for two clients, Fund of Funds Ltd (FF) and
King Resources Corp. (KRC). KRC developed natural resource properties and agreed to be the
sole vendor of such properties to FF at prices no higher than those charged KRS¶s industrial
clients. AA learned the agreement was not being met but failed to inform FF. The court ruled AA
should have disclosed this fact to FF because 1) they had knowledge of the overcharges, 2)
they knew of the terms of the agreement that was being violated and 3) the language of their
engagement letter produced a contractual obligation to reveal such information. (Cashell, J.D.,
Fuerman, R.D.) This case proved that auditors got the obligation to disclose fraud or any
misstatement to the outsiders.



















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According to the Æ;
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undertake to determine whether the information is reliable and whether the facts existed at the
date of his report. This undertaking must be performed even when the auditor has resigned or
been discharged.

Hence, when Touche Ross had learned of the error in AFS¶s 1985 financial statements,
it still has its own responsibility to investigate its reliability and whether it existed at the date of
the report although it had resigned as AFS¶s auditor following the completion of the 1985 audit.
If the investigation finds the financial statements or report would have been affected by the error
if known earlier and it is believed there are persons currently relying or likely to rely on the
financial statements who would attach importance to the information, the auditor who have
resigned should also advise the client to make appropriate disclosure of the newly discovered
facts. The responsibilities of the resigned auditors in the situations in which a client cooperates
with the auditors in making all necessary disclosures and situations involving uncooperative
clients are totally the same with the continuing auditor.

As stated in the case P


 , Peat, Marwick, Mitchell & Co. (PMM) had
reported on financial statements it later discovered were incorrect at the time they were issued.
PMM argued their duty ended once the audit report was issued. A key factor in the court¶s
denial of PMM¶s motion to dismiss the claim was the representations were false at the time of
issuance. (Cashell, J.D., Fuerman, R.D.) ëack to the AFS case, if the Touche Ross had
resigned as an auditor for AFS, it still had the responsibilities to correct previously issued
information. It is because the error happened in AFS¶s 1985 financial statement which Touche
Ross was fully in charged in auditing the financial statement in that particular year. In addition,
Touche Ross who had resigned as an auditor of AFS should inform the successor auditor of
AFS of the material misstatement so that the successor will aware of the issue and might carry
out extensive audit procedures by collecting more audit evidence in the current year audit to
avoid the same issue happened in the current year.
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Messier, Jr., W., Glover, S. M. & Prawitt, D. F. (2008). Æuditing & Æssurance Services: Æ
Systematic Æ roach. New York: McGraw-Hill/Irwin

Arens, A. A., Elder, R. J., ëeasley, M. S., Amran, N. A., Fadzil, F. H., Muhammad Yusof, N. Z.,
et al. (2008). Æuditing and Æssurance Services in Malaysia: Æn Integrated Æ roach
(Second Edition). Selangor: Prentice Hall

Cashell, J.D. & Fuerman, R.D. (n.d), Auditing: The CPA¶s Responsibility for Client Information.
The CPÆ Journal. Retrieved October 12, 2009 from
http://www.nysscpa.org/cpajournal/1995/SEP95/aud0995.htm

International Federation of Accountants (2008). Handbook of International Æuditing, Æssurance,

and Ethics Pronouncements. Retrieved October 12, 2009 from
http://www.ifac.org/Members/DownLoads/2008_IAASë_Handbook_Part_I-
Compilation.pdf

Malaysian Institute of Accountants (2008). ëy-Laws (On Professional Ethics, Conduct and
Practice). Retrieved October 12, 2009 from www.mia.org.my

AICPA (2002). Æuditing Standard (Æ
) Section 9561 Subsequent Discovery of Facts Existing at
the Date of the Æuditor¶s Re ort: Æuditing Inter retations of Section 561. Retrieved
October 12, 2009 from http://www.aicpa.org/download/members/div/auditstd/AU-
00561_9.PDF

AICPA (2002). Æuditing Standard (Æ
) Section 561 Subsequent Discovery of Facts Existing at
the Date of the Æuditor¶s Re ort Retrieved October 12, 2009 from
http://www.aicpa.org/download/members/div/auditstd/AU-00561.PDF

International Federation of Accountants (2007). Guide to
sing International Standards on

Æuditing in the Æudits of Small and Medium sized Entities. Retrieved October 12, 2009
from
http://siteresources.worldbank.org/INTELSALVADORINSPANISH/Resources/ISA_Audit
_Guide.pdf