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The external auditor 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. Therefore, the external auditor has some responsibility for considering the risk of material misstatement due to fraud
Fraud is a term used where money is involved to represent ant deceit, representation forgery or impersonation in payment
Auditors are gatekeepers and therefore the importance of their responsibilities with respect to the identification of risks of material misstatement due to fraud
Fraud involves deception, misrepresentation, or concealment of facts for personal gain or harm to others. External auditors have a significant responsibility in preventing and detecting fraud. They are expected to detect fraud in financial reporting and provide assurance to shareholders and stakeholders regarding the accuracy of financial statements.
The objectives of external auditors regarding fraud include identifying and assessing the risks of material misstatement due to financial statement fraud, designing appropriate responses, and responding to any identified instances of financial statement fraud. They review journal entries, interview company accountants, and test procedures to uncover potential risks. However, there are limitations to what external auditors can uncover.
Upon finding evidence of fraudulent accounting, external auditors communicate their findings to the relevant committee or governing body within the company. They also report any procedures that may put the company at risk of fraud. However, external auditors cannot create new procedures or guidelines for the company and must maintain professional independence.
Additionally, external auditors have a responsibility to report possible irregularities to competent authorities such as tax or judicial bodies. This plays a crucial role in detecting and preventing manipulations within a company's operations.
Fraud refers to intentional deception or misrepresentation of facts, typically carried out for personal or financial gain, resulting in harm to individuals, organizations, or society. It involves acts such as falsifying documents, manipulating financial statements, embezzling funds, or engaging in deceptive practices.
The responsibility of an external auditor regarding fraud prevention and detection is significant. While it is essential to note that the primary responsibility for fraud prevention lies with management and those charged with governance within an organization, external auditors play a crucial role in assessing the risk of fraud and implementing measures to mitigate it. Here are some key aspects of their responsibility:
Risk Assessment: External auditors are responsible for evaluating the risk of fraud within an organization. This involves gaining an understanding of the internal control systems, identifying potential vulnerabilities, and assessing the likelihood and potential impact of fraud occurrences.
Testing and Verification: Auditors conduct thorough testing and verification procedures to obtain reasonable assurance that financial statements are free from material misstatements due to fraud. They employ various techniques such as analytical procedures, data analysis, and substantive testing to uncover irregularities or suspicious transactions.
Professional Skepticism: External auditors must maintain a skeptical mindset throughout the audit process, questioning and critically assessing the information provided. They are expected to exercise professional judgment and maintain an unbiased approach, actively searching for potential fraudulent activities.
Fraud Detection Procedures: Auditors are required to design and perform procedures specifically aimed at detecting fraud. These may include analyzing unusual transactions, examining supporting documents, investigating inconsistencies, and conducting interviews with key personnel.
Reporting: If auditors encounter evidence of fraud during the course of their work, they have a responsibility to report it. This involves communicating their findings to management, those charged with governance, and, in some cases, regulatory authorities. The reporting should be conducted promptly and in accordance with professional standards and legal obligations.
It is important to note that while auditors have a responsibility to exercise due professional care in detecting fraud, the nature of fraud makes it challenging to guarantee its complete prevention or detection. Fraud perpetrators often employ sophisticated techniques to conceal their activities, making it difficult for auditors to detect every instance. Nevertheless, auditors play a critical role in providing independent assurance and enhancing the overall integrity of financial reporting processes, which contributes to deterring and uncovering fraudulent activities.
Fraud is an intentional activity to misstate or manipulate the financial statements or committing an intentionally act for deceiving the management or other stakeholder. Generally frauds are done in cash. The external auditor is supposed to detect and locate frauds in the transactions and the financial record.
