Question

Fraud in Financial Statements and Auditor Responsibilities

According to the AICPA audit standard on fraud, Consideration of Fraud in a Financial Statement Audit (AU-C Section 240), the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. A strong emphasis should be placed 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. As we discussed in chapter 3, this involves a commitment to creating a culture of ethical behavior, tone at the top, and reinforcement through governance structures.

Nature and Causes of Misstatements

Misstatements in the financial statements can result from errors or fraud and may consist of any of the following:

1. An inaccuracy in gathering or processing data from which financial statements are prepared.

2. A difference between the amount, classification, or presentation of a reported financial statement element, account, or item and the way that it should have been reflected under GAAP.

3. The omission of a financial statement element, account, or item.

4. A financial statement disclosure that is not presented in conformity with GAAP.

5. The omission of information required to be disclosed in conformity with GAAP.

6. An incorrect accounting estimate due to oversight, misrepresentation of facts, or fraud.

7. Management’s judgments concerning an accounting estimate or the selection or application of accounting policies that the auditor may consider unreasonable or inappropriate.   For discussion purposes

8. What steps would you take if you discover 1 of the above issues in a routine audit?

9. Would you take the same steps if you discover all 7 issues above in a routine audit?

Answer 1

1.determine overall responses to address the assessed
risks of material misstatement due to fraud at the financial statement level
and should design and perform further audit procedures whose nature,
timing and extent are responsive to the assessed risks at the assertion level.

2. Perform substantive procedures that are specially responsive to risk that are assessed as significant risk as per AU-C Section 330.

3. Increase professional skepticism and a r involving more general consideration.

4. Consider assignment and supervision of personnel. Assign an additional individual with specialised skill and knowledge such as forensic or IT expert.

5. Consider the accounting policies followed by the entity.

6. Incorporate an element of unpredictability in the selection of Nature, Timing and Extent of audit procedures.

7. Obtain an understanding of business rationale for significant transaction that is outside the normal course of business.

8.  the auditor has identified a fraud or has obtained information that
indicates that a fraud may exist, the auditor should communicate these
matters as soon as practicable to the appropriate level of management.

9. If the auditor has identified fraud involving:
(a) Management;
(b) Employees who have significant roles in internal control; or
(c) Others where the fraud results in a material misstatement in the
financial statements,
the auditor should communicate these matters to those charged with
governance as soon as practicable.

10. Auditor should identify he has any legal responsibility to communicate it to Regulatory or Enforcement Authority. Obtain legal advice.