Question

Assessing the risk of fraud in a financial statement audit is a difficult audit judgment. Auditing standards require the auditor to perform several audit procedures to accumulate information to assess the risk of fraud. You are the in-charge auditor responsible for planning the financial statement audit of Spencer, Inc. Two new staff auditors are assisting you with the initial audit planning and have asked you the questions below. Please summarize your responses to these staff auditor questions:

a. What is the purpose of the audit team's brainstorming session?

b. Who should attend the brainstorming session and when should the session be held?

c. What is the role of the two staff auditors in the brainstorming session?

d. What is the auditor's responsibility under auditing standards for detecting fraud?

e. What must the auditor document in the working papers related to the brainstorming session?

Answer 1

Answer :

a.         The purpose of the audit team's brainstorming session is for the audit team to exchange ideas about how and where they believe the entity's financial statements might be susceptible to material misstatement due to fraud, how management could perpetrate and conceal fraudulent financial reporting, and how assets of the entity could be misappropriated.

b.         The brainstorming meeting should ordinarily involve the key members of the audit team, ranging from audit staff members to partners on the engagement. This meeting would include audit team members located in other offices who work on the engagement as well as audit specialists, such as tax or IT specialists who work on the audit engagement.

The meeting should be held during planning so that the audit plan can be adjusted to address the identified risks, and emphasize professional skepticism throughout the engagement.

c.         The two staff members on the engagement are just as responsible for engaging in the exchange of ideas as other members of the engagement team. While the two new staff accountants may not be familiar with engagement specifics, they do provide a fresh perspective of possible ways management might engage in fraud.

More importantly, they will benefit from hearing the exchange of ideas from other members of the audit team. That should help heighten their professional skepticism as they perform the audit.

d.         The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Thus, the auditor's detection responsibility for fraud is no different from the auditor's detection responsibility for errors .