Professional Documents
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Sa March09 Jones
Sa March09 Jones
Fraud is a highly controversial area, and the extent ‘An auditor is not bound to be a detective, or The two types of fraud most relevant to the
of auditor responsibility for the prevention and … to approach his work with suspicion, or with auditor, according to ISA 240 (Redrafted), are
detection of fraud has generated considerable a foregone conclusion that there is something misstatements arising from fraudulent financial
discussion in recent years. This article aims wrong. He is a watchdog, not a bloodhound.’ reporting, and misstatements arising from the
to summarise the current extent of auditor (Reference 3). Watchdogs and Bloodhounds misappropriation of assets. By way of contrast to
responsibilities for fraud, as per the requirements (below) gives formal definitions of a ‘watchdog’ fraud, the term ‘error’ refers to an unintentional
of ISA 240 (Redrafted), The Auditor’s and a ‘bloodhound’. misstatement in financial statements, including
Responsibilities Relating to Fraud in an Audit of Clearly, auditing has changed considerably the omission of an amount or a disclosure.
Financial Statements. ISA 240 (Redrafted) was since 1896, although auditor responsibility for ISA 240 (Redrafted) says: ‘The distinguishing
issued in December 2006 and is effective for fraud detection has remained a low priority. We factor between fraud and error is whether the
audits of financial statements for periods beginning now consider the requirements of the recently underlying action that results in the misstatement
on or after 15 December 2008. The International revised audit standard regarding the role of the of the financial statements is intentional or
Auditing and Assurance Standards Board (IAASB) auditor and fraud detection, and then form a unintentional.’ ISA 240 (Redrafted), paragraph 2.
Clarity Project was launched in 2004 in order conclusion about the current extent of auditor The emphasis of this article is on fraud,
to encourage greater use of its standards and to responsibility for fraud detection. because fraud responsibilities are more
facilitate the process of translation of standards controversial than error. Fraud may involve
into other languages. ISA 240 is described by THE DIFFERENCE BETWEEN FRAUD sophisticated and carefully organised schemes,
the IAASB Handbook (reference 1) as ‘redrafted’ AND ERROR designed to conceal fraudulent activity, such
because it has been revised in the past few years The key distinguishing factor between fraud
and is not in need of further revision by the Clarity and error is whether the underlying action
Project. As a result, the ‘clarified’ version of ISA that results in a misstatement of the financial WATCHDOGS AND BLOODHOUNDS
240 is the same as the redrafted version. See the statements is intentional or unintentional. The The Oxford English Dictionary gives the
IAASB Handbook, and the section ‘Background term ‘fraud’ is a broad legal concept, but the following definitions (Reference 4).
Information on the Clarity Project of the IAASB’ for auditor is concerned with fraud that causes
further details (reference 2). a material misstatement in the financial A watchdog is defined as ‘A dog kept to guard
statements. ISA 240 (Redrafted) defines private property’, and ‘a person or group that
BACKGROUND fraud as: ‘An intentional act by one or more monitors the practices of companies providing
The traditional ‘passive philosophy’ towards individuals among management, those charged a particular service or utility’.
auditor responsibility for fraud detection is well with governance, employees, or third parties,
summarised by the Lord Justice Lopes’ ruling, in involving the use of deception to obtain an A bloodhound is defined as ‘A large hound with
the UK, given in the 1896 Kingston Cotton Mill unjust or illegal advantage.’ ISA 240 (Redrafted), a very keen sense of smell, used in tracking’.
case (re Kingston Cotton Mill Company (No.2)): paragraph 11.
technical THINKING PER?
page 51 PERFORMANCE OBJECTIVEs 17 AND 18 ARE linked TO PAPER f8
as forgery, area discussed in the rest of circumstances that suggest the need for audit
deliberate failure this article. procedures in addition to those required by
to record transactions, or the ISAs.
intentional misrepresentations being PROFESSIONAL Skepticism
made to the auditor. However, in order to better ISA 200 (Revised and Redrafted), Overall DISCUSSION AMONG THE ENGAGEMENT TEAM
understand error, more consideration of internal Objective of the Independent Auditor and the ISA 240 (Redrafted) refers to the requirement in
control effectiveness is required. Conduct of an Audit in Accordance with ISAs, ISA 315 (Redrafted), Identifying and Assessing
requires the auditor to maintain an attitude the Risks of Material Misstatement Through
ISA 240 (REDRAFTED) AND RESPONSIBILITIES of professional skepticism: ‘The auditor shall Understanding the Entity and its Environment,
FOR FRAUD plan and perform an audit with professional that members of the engagement team discuss the
ISA 240 (Redrafted) makes it clear who has skepticism, recognising that circumstances susceptibility of the entity’s financial statements
the main responsibility for the prevention and may exist that cause the financial statements to to material misstatement due to fraud. ISA 240
detection of fraud: ‘The primary responsibility be materially misstated.’ ISA 200 (Revised and (Redrafted) requires that: ‘This discussion shall
for the prevention and detection of fraud rests Redrafted), paragraph 15. place particular emphasis on how and where the
with both those charged with governance of the ISA 200 (Revised and Redrafted) describes entity’s financial statements may be susceptible
entity and management.’ ISA 240 (Redrafted) professional skepticism as: ‘An attitude that to material misstatement due to fraud, including
paragraph 4. includes a questioning mind, being alert how fraud might occur.’ ISA 240 (Redrafted),
ISA 240 (Redrafted) also goes on to state, to conditions which may indicate possible paragraph 15.
however, that: ‘An auditor conducting an audit misstatement due to error or fraud, and a critical Ordinarily, the key members of the engagement
in accordance with ISAs is responsible for assessment of audit evidence.’ ISA 200 (Revised team should be involved in the discussion, and the
obtaining reasonable assurance that the financial and Redrafted), paragraph 13 (l). engagement partner should then consider which
statements as a whole are free from material ISA 240 (Redrafted) further requires that: ‘The matters are to be communicated to those in the
misstatement, whether caused by fraud or error.’ auditor is responsible for maintaining an attitude team not involved in the discussion. Discussion is
ISA 240 (Redrafted), paragraph 5. of professional skepticism throughout the audit.’ expected to occur with a questioning mind, setting
Hence, both the entity itself and the auditors ISA 240 (Redrafted), paragraph 8. aside any beliefs held by the engagement team
have responsibilities for fraud and error. It could Professional skepticism is of key importance members that the management and those charged
be said that management, and those charged to the audit, for example requiring auditors to be with governance are honest and have integrity.
with governance, have the primary responsibility alert to: Interestingly, this discussion is also expected
for fraud and error, whereas the auditor has a audit evidence contradicting other to include a consideration of how an element
secondary responsibility. It is important, however, evidence of unpredictability will be incorporated into the
to ensure that the extent of these secondary information questioning evidence reliability nature, timing, and extent of the audit procedures
responsibilities are clearly understood, which is the conditions that may indicate possible fraud to be performed.
technical student accountANT
page 52 MARCH 2009