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auditors are not responsible for detecting fraud, but they are responsible for ensuring that the company has sound control environment and internal controls that would prevent and detect fraud.
ISA 240- 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
THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS 157 ISA 240 AUDITING Introduction Scope of this ISA
1. This International Standard on Auditing (ISA) deals with the auditor’s responsibilities relating to fraud in an audit of financial statements. Specifically, it expands on how ISA 3151 and ISA 3302 are to be applied in relation to risks of material misstatement due to fraud. Characteristics of Fraud
2. Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional.
3. Although fraud is a broad legal concept, for the purposes of the ISAs, the auditor is concerned with fraud that causes a material misstatement in the financial statements. Two types of intentional misstatements are relevant to the auditor – misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets. Although the auditor may suspect or, in rare cases, identify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually occurred. (Ref: Para. A1–A6) Responsibility for the Prevention and Detection of Fraud
4. The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This involves a commitment to creating a culture of honesty and ethical behavior which can be reinforced by an active oversight by those charged with governance. Oversight by those charged with governance includes considering the potential for override of controls or other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity’s performance and profitability.
Responsibilities of the Auditor
5. 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.36. As described in ISA 200,4 the potential effects of inherent limitations are particularly significant in the case of misstatement resulting from fraud. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error. This is because fraud may involve sophisticated and carefully organized schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor. Such attempts at concealment may be even more difficult to detect when accompanied by collusion. Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact, false. The auditor’s ability to detect a fraud depends on factors such as the skillfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved. While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for the auditor to determine whether misstatements in judgment areas such as accounting estimates are caused by fraud or error.
7. Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other employees.
8. 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. Effective Date
9. This ISA is effective for audits of financial statements for periods beginning on or after December 15, 2009. Objectives
10. The objectives of the auditor are:
(a) To identify and assess the risks of material misstatement of the financial statements due to fraud;
(b) To obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and
(c) To respond appropriately to fraud or suspected fraud identified during the audit. Definitions
11. For purposes of the ISAs, the following terms have the meanings attributed below:
(a) Fraud – 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.
(b) Fraud risk factors – Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Requirements Professional Skepticism
12. In accordance with ISA 2005, the auditor shall maintain professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with governance. (Ref: Para. A7–A8)
13. Unless the auditor has reason to believe the contrary, the auditor may accept records and documents as genuine. If conditions identified during the audit cause the auditor to believe that a document may not be authentic or that terms in a document have been modified but not disclosed to the auditor, the auditor shall investigate further. (Ref: Para. A9)
14. Where responses to inquiries of management or those charged with governance are inconsistent, the auditor shall investigate the inconsistencies.
The negative aspects of disclosing the financial statements can be explained in the following: - Loss of confidence in financial statements by dealers, investors, lenders, Maureen and other users- The collapse of the price of the stock traded in the securities market- The responsibility of the management of the company and the auditor for those lists.- Loss of confidence in the auditor of that company for not detecting fraud in the lists Also, we should not overlook the reference to IAS 8 Accounting Policies Changes in accounting estimates and errors where the standard refers to inadvertent errors and intentional errorsIt should also be clarified that the main objective of the external auditor is to serve the shareholders of the company by means of an opinion on the soundness of the preparation of the financial reports prepared by the company and they appear fairly in all the essential aspects and not have any errors or fraud within the sample examination to complete the audit of those lists either internal auditor The main objective is to ensure the integrity of the accounting system of the company and the accuracy of data extracted and also has a leading role in preventing errors or fraud about the policies and regulations and systems approved to work for the companyInternational Standard for International AuditingObjective and basic principles Governing and Audit.As well as the Second International Standard for International AuditingAudit Engagement Letters. Management's responsibility for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards. Management's responsibility includes the design and application of an internal control system for the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, the selection and application of appropriate accounting policies, According to the circumstances. While the responsibility of the external auditor is limited to expressing the neutral technical opinion on the financial statements and the budget based on the audit work carried out in accordance with the international auditing standards until it appears in his report that these lists fairly show in all material respects the financial position of the company at the date of preparation of the financial statements and their financial performance and flows Cash.Creative accounting is a form of manipulation in the preparation of financial statements and is used as an example when recording doubtful income, transferring expenses due to subsequent years, reducing the value of liabilities, overvaluation of intangible assets, failure to comply with the historical cost of assets principle or manipulating market prices for investments Financial or manipulative accounts of debtors not to disclose bad debt balances or change the accounting methods used in long-term investments and real estate investments, as well as not to include the installments due to loans or the addition of previous years gains to net profit for the year Larry and other ways of manipulation and fraud and can be reduced according to the following: - Establishment of corporate review committees with the task of appointing the external auditor and determining his / her fees in an attempt to increase his / her independence. - Reducing the number of alternatives to accounting treatments and eliminating the use of some of them. - Limiting the use of certain accounting policies and eliminating some of them. - Activating consistency in the use of property accounting policies adopted by the authors of the financial statements. - Selection of efficient and reliable audit offices to reduce the use of creative accounting methods. - Accounting development of culture among investors and interested users of financial information. - Activating the professional organization of the accounting and auditing profession and develop a charter of professional conduct. As stated above, the importance of the auditor's report on the financial statements in detecting fraud, fraud and errors can be clarified and reported in his report Methods of manipulation of accounts (fraud) for the purpose of changing the outcome of the activity of profit or loss and how the disclosure of references This situation can be manipulated in different ways as follows: - To postpone the registration of purchases that are late for the fiscal year until the beginning of the following period, despite the receipt of the goods to the company and its entry in the warehouse records and their appearance within the stock of the last period in order to amplify the profit. - The recording of the returns of the purchases may be delayed by the end of the financial period, keeping them in the warehouse and including them in the remaining goods in the inventory, even though such returns are recorded in the special journal and transferred to the supplier account. - Deferral of proof of sales of the last period with inventory records and listing them in the inventory, despite proving that sales in the private journal and transferring them to customer accounts for the purpose of inflating profits. - Delay the confirmation of sales returns to the special journal and migrate them to the accounts of the competent customer, despite the feedback of the goods returned to the warehouses and included in the inventory. - Certain expenses are considered capital expenditures. - Not making sufficient provisions for doubtful debts and other obligations. - Do not calculate depreciation on fixed assets or manipulation of the approved depreciation rates. - Overvaluation of stock value for the last period. - An overvaluation of the fair value of investment properties in the second period of valuation to prove the increase in income statement to maximize profits. Procedures for discovering account manipulation: - To examine the purchases, sales and related returns in a comprehensive examination, in particular operations carried out after the end of the financial year. - Ensure that there is no confusion between expenditure and capital expenditures. - Ensuring adequacy of allocations. - Ensuring that the depreciation is calculated on the assets and the revision of the depreciation ratios and the extent of their conformity with the orphan
The auditor has a responsibility to plan and perform the audit to ob- tain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain ..
