Question

7- Are auditors responsible for frauds? Discuss the auditor responsibility for the detection of errors and frauds? Support your answer from the Annual report of 2019 of Saudi Aramco

Answer 1

Since, Auditors perform their work on a sample basis and do not test every transaction; therefore all the fraud or errors can’t be traced.

The responsibility of an auditor is to express an opinion on financial statements and to ensure that documents are free from material misstatement. These auditors do not express their opinion on the effectiveness of the organization’s internal controls. Rather, they consider these controls relevant to the preparation and fair presentation of financial statements and perform procedures designed to identify fraud risks that have been surfaced in audit planning.

Therefore we can say that the primary responsibility for the frauds is of the management or the governing body. An auditor conducting an audit in accordance with professional standards is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by error or fraud.

Following are the responsibilities of an auditor:

· Identify and assess the risk of material misstatements due to fraud and error

· Obtain adequate audit evidence for the risk identified

· Respond appropriately to the identified or suspected fraud.

The statement of Auditors regarding their responsibility for the audit of financial statement in the annual report of Saudi aramco for the year 2019 is reproduced as under

“Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion, Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing, that are endorsed in the Kingdom of Saudi Arabia, will always detect a material misstatement when it exists.

As part of an audit in accordance with International Standards on Auditing, that are endorsed in the Kingdom of Saudi Arabia, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

· Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors.

· Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

· Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.”

Therefore from the above statement of auditors in the annual report of Saudi Aramco for the year 2019, we can conclude that the auditors are to obtain the reasonable assurance that the financial statements which they have audited are free from material misstatements, they can give high level of assurance as to correctness of the financial statements but can’t guarantee that the audited conducted in accordance with the applicable auditing standards will always detect the material misstatements.

There may be cases where due to collusions, forgery, intentional omissions, misrepresentations, or due to override of internal controls, etc. the material misstatements may not come to knowledge of the auditor and they may not be able to report the same in their audit report. It is completely based on the representation of management about the correctness of the information and explanations given by them to the auditors.

As it is a very true saying that the auditors of the company are the watchdogs and not the blood hounds, which remains correct here, because an auditor can only have a reasonable care in the audit process by gathering all the required information, and adhering to the applicable accounting standards, policies and the auditing standards while conducting the audit. Beyond that they are not able to check further.