Question

Indicate whether you agree or disagree with the following statements and explain your reasoning.

a)    Related party transactions require proper identification and consideration when considering risk. However, there is no requirement to disclose related party transactions unless they have an impact on material misstatements.

b)    When assessing fraud risk, auditors should adopt an attitude of professional scepticism to ensure that any indicator of a potential fraud is properly investigated.

c)    The responsibility for preventing and detecting fraud rests with those charged with governance at the client as well as the auditors.

d)    The auditor should not ask management and those charged with governance if they are aware of a known fraud or suspect there has been fraud.  

e)    Elvie Lee explained to her friend how application controls work: “Application controls are designed to prevent and detect a material misstatement in the financial statements.”

Answer 1

(a) DIsagree. Many of the global financial reporting frameworks include specific requirements in respect of accounting for disclosure of all related party relationships, transactions and balances. The rationale behind this is that related parties by their nature are not independent of each other and can materially impact a finance transaction. Therefore, additional disclosures and more stringent rules are followed for it's disclosure to enable users of the financial statements to understand their nature and the potential impact on the business.

(b) Agree. SAS 99 issued by the Auditing Standards Board of AICPA has provided guidelines to help auditors do their jobs even more effectively and to audit smarter. It tries to give away the checklist mentality and make the auditor a better thinker. It puts professional scepticism in front and center, exactly where it should be. It also reminds auditors to shed over-reliance on client representations and adopt a sceptical attitude with a more challenging approach.It teaches auditors on how they can adopt sceptical mind-set on their engagements, particularly during audit planning and the evaluation of audit evidence.

(c) Agree. In accordance with International Standards on Auditing (ISA), fraud is "an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. The Institute of Internal Auditors (IIA) defines fraud as "any illegal act characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the threat of violence or physical force. Frauds are perpetrated by those entrusted in management or related stakeholders for a business or personal advantage.

(d) Disagree. While the auditor is entrusted with the duty of performing an independent audit of all operational controls and checks in place, question every doubtful event and highlight loopholes, it doesn't stop him from getting the confidence of the management to ensure whether the controls are in place or the management suspects any event of fraud or risk. It might be the case where management can provide deeper information in case they feel there's a genuine risk and the auditor might help with his professional knowledge in fixing it.

(e) Disagree. Application Controls are mainly related with system controls. Application Controls focus on the input, processing and output of data processing. They might be general or unique to each activity, such as payroll or invoice processing. The focus of application controls is to ensure that the internal processing provides expected output.