Question

Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Post discovered that General's financial statements might be materially misstated due to the existence of fraud.

A. Describe post's responsibilities in the circumstances described above.

B. Describe post's responsibilities for reporting on general's financial statements and other communications if post is precluded from applying necessary procedures in searching for frauds.

C. Describe post's responsibilities for reporting on general's financial statements and other communications if post concludes that general's financial statements are materially affected by frauds. (AICPA adapted)

Answer 1

A. RESPONSIBILITY OF THE AUDITOR IN CASE OF SUSPECTED FRAUD IN THE FS.

ISA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” requires that the auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole are free from material misstatement, whether caused by fraud or error.

-When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of professional skepticism throughout the audit.

-The auditor should recognize the possibility that a material misstatement due to fraud could exist.

- When the auditor comes across such circumstances indicating the possible misstatements resulting from entity’s procedure, the auditor shall evaluate whether such a misstatement is indicative of fraud.

-The auditor should perform the following Risk assessment procedure to assess the risk-

1.Enquiring with the management and others in the entity

2.Enquiring with those charged with governence

3.evaluating the unusual relationships through analytical procedures

4. Evaluating fraud risk factor.

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#B.RESPONSIBILITY OF AUDITOR IN CASE THE AUDITOR IS PRECLUDED FROM APPLYING NECESSERY PROCEDURES-

-ISA 240, “The Auditor’s responsibilities relating to Fraud in an Audit of Financial Statements”, deals with auditor’s responsibilities in relation to fraud while performing the audit. Accordingly, if the auditor conclude that it is not possible to continue performing the audit as a result of misstatement resulting from fraud or suspected fraud,or the auditor is precluded from applying necessery procedure the auditor should:-

(a) Consider the professional and legal responsibilities applicable in the circumstances, including whether there is a requirement for the auditor to report to the person or persons who made the audit appointment or, in some cases, to regulatory authorities;

(b) Consider the possibility of withdrawing from the engagement; and

(c) If the auditor withdraws: -

• Discuss with the appropriate level of management and TCWG, the auditor’s withdrawal from the engagement and the reasons for the withdrawal; and

• Determine whether there is a professional or legal requirement to report to the person or persons who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s withdrawal from the engagement and the reasons for the withdrawal.

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#C.Auditors Responsibility in case Auditor concludes that general's financial statements are materially affected by frauds-

-ISA 240, “The Auditor’s responsibilities relating to Fraud in an Audit of Financial Statements”, deals with auditor’s responsibilities in relation to fraud while performing the audit.It is important to note that fraud is a criminal activity. It is not the role of an auditor to determine whether fraud has actually occurred. That is the responsibility of a country's legal system. Auditors must be aware of the impact of both fraud and error on the accuracy of the financial statements.

-If the auditor identifies a fraud they should communicate the matter on a timely basis to the appropriate level of management (i.e. those with the primary responsibility for prevention and detection of fraud).

-If the suspected fraud involves management the auditor shall communicate such matters to those charged with governance. If the auditor has doubts about the integrity of those charged with governance they should seek legal advice regarding an appropriate course of action.

-In addition to these responsibilities the auditor must also consider whether they have a responsibility to report the occurrence of a suspicion to a party outside the entity. Whilst the auditor does have an ethical duty to maintain confidentiality, it is likely that any legal responsibility will take precedent. In these circumstances it is advisable to seek legal advice.