Question

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what is the auditor’s responsibility under auditing standards for detecting fraud.

Answer 1

An auditor conducting an audit in accordance with Standard Auditing practices is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from materials misstatement, whether caused by error or fraud. Owing to the inherent limitations of an audit, there is an unavoidable risk that some materials misstatements of the financial statements will not be detected, even though the audit is properly planned and performed.

The risk of not detecting a materials misstatement resulting from fraud is higher than the risk of 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 faillure 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 s 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 amount 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 judgement areas such as accounting estimates are caused by fraud or error.

Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraudis greater then for employees 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.

When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of 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. Standard Auditing practices are designed to assist the auditor in identifying and assessing the risk of material misstatemen due to fraud and in designing procedures to detect such misstatement.