Question

1. Write a short essay describing auditors responsibilities related to discovering fraud. Also include a discussion of the auditors’ documentation requirements regarding the assessment of the risk of material misstatement due to fraud. Make sure to cite the appropriate professional literature. (8 points)

Answer 1

Responsibilities of auditor regarding discovering fraud is the Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment goes further than this general concept and requires that engagement teams discuss the susceptibility of their clients to fraud. The engagement team should also obtain information for use in identifying the risk of fraud when performing risk assessment procedures.

To be able to make such an assessment auditors must identify, through enquiry, how management assesses and responds to the risk of fraud. The auditor must also enquire of management, internal auditors and those charged with governance if they are aware of any actual or suspected fraudulent activity.

Despite these requirements, owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements may not be detected, even when the audit is planned and performed in accordance with ISAs. The risks in respect of fraud are higher than those for error because fraud may involve sophisticated and carefully organised schemes designed to conceal. Auditor may be given an assignment:-

• to assess the likelihood of fraud, or if a fraud has been discovered,
• to assess its consequences and
• to make recommendations for prevention in the future

The auditor should document the following:-

1. The discussion among engagement personnel in planning the audit regarding the susceptibility of the entity's financial statements to material misstatement due to fraud, including how and when the discussion occurred, the audit team members who participated, and the subject matter discussed
2. The procedures performed to obtain information necessary to identify and assess the fraud risks
3. The fraud risks that were identified at the financial statement and assertion levels
4. The results of the procedures performed to address the assessed fraud risks, including those procedures performed to further address the risk of management override of controls

The nature of the communications about fraud made to management, the audit committee, and others .