What are the auditor responsibilties as per ISA 240 relating to detection of fraud or error?

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ISA  240: The Auditor 's responsibility to consider Fraud And Error states that when planing and performing audit procedures and evaluating and reporting  the results thereof, the auditor should consider the risks of material misstatements in the financial statements resulting from fraud or error.

Misstatement in the financial statements can arise from fraud or error.

Error refers to an unintentional misstatement in financial statements , including the omission of an amount or a disclosure e.g  a mistake in gathering or processing data from which financial statements are prepared.

Fraud refers to an intentional act by one or more individuals among management , those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Fraud involving one or  members of management or those charged with governance is referred to as management fraud, fraud involving only employees of the entity is referred to as employee fraud. In either case, there may be collusion with third parties outside the entity.

The distinguishing factor between fraud and error is whether the  underlying action that results in the  misstatement in the financial statements is intentional or unintentional. Unlike error, fraud is intentional and usually involves deliberate concealment of the facts.

While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult, for the auditor to determine intent, especially in matters involving management judgement, such as accounting estimates and the appropriate application of accounting principles.

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Responsibilities of the Auditor

An auditor conducting an audit in accordance with ISAs is responsible for

obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs

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As per ISA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” misstatement in the financial statements can arise from fraud or error. The term fraud refers to an ‘Intentional Act’ by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. The auditor is concerned with fraudulent acts that cause a material misstatement in the financial statements.

 

Fraud involving one or more members of management or those charged with the governance is referred to as “management fraud”. The primary responsibility for the prevention and detection of fraud rests with those charged with the governance and the management of the entity.

 

An auditor conducting an audit in accordance with ISAs obtains reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. An auditor cannot obtain absolute assurance that material misstatements in the financial statements will be detected because of such factors as the use of judgment, the use of testing, the inherent limitations of internal control and the fact that much of the audit evidence available to the auditor is persuasive rather than conclusive in nature.

 

 

When obtaining reasonable assurance, an auditor maintains an attitude of professional skepticism throughout the audit, considers the potential for management override of controls and recognizes the fact that audit procedures that are effective for detecting error may not be appropriate in the context of an identified risk of material misstatement due to fraud. The remainder of this ISA provides additional guidance on considering the risks of fraud in an audit and designing procedures to detect material misstatements due to fraud.

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Auditor is required to carry out audit engagement with an attitude of professional skepticism. To make audit engagement effective discussions among team members, inquiries of personnel involved in the management of the entity and communicating with those charged with governance is important.

An auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs. When obtaining reasonable assurance, the auditor is responsible for maintaining professional skepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud. The requirements in this ISA are designed to assist the auditor in identifying and assessing the risks of material misstatement due to fraud and in designing procedures to detect such misstatement.

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