TOPIC #4:
statements or may draft statement.^
CPA’s Professional Responsibilities
Auditor’s Responsibility
Are Auditors Expected to Detect and Prevent Fraud for their Client?
Auditor’s responsibility vs. client management’s responsibility:
 The client management, with oversight from those charged with governance,
has the responsibility for the preparation and presentation of the financial
statements in accordance with the applicable financial reporting framework.
In other words, the management is primarily responsible for the fairness of
the financial statements.
 The auditor’s responsibility for the financial statements is confined to the
expression of opinion on them. The audit of the financial statements does
not relieve management or those charged with governance of their
responsibilities over the financial statements because the auditor merely
audits the financial statements.
However, an auditor may make suggestions on the form and content of financial
Fraud, Error and Non-Compliance
Errors – refer to mistakes or unintentional misstatements or omissions of amounts
or disclosures in the financial statements. Examples:
1.) Mistakes in gathering or processing data from which FS are
prepared
2.) Incorrect accounting estimate arising from oversight or
misinterpretation of facts
3.) Mistake in applying accounting principles
Fraud – intentional misstatements or omissions of amounts or disclosures in the
financial statements
The term “fraud” refers to 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.
Non Compliance (Illegal Acts)- Intentional non Compliance with rules and regulations
set up by Authoritative Bodies I.E: BIR, SEC, DIT and Other Authoritative Bodies
Types of Fraud
1.) Management Fraud/ Financial Statement Fraud
2.) 2.) Employee Fraud
1.) Management Fraud/ Financial Statement Fraud
intentional misstatements committed by members of management or those charged
with governance or oversight to render financial statements misleading to deceive
users of the financial statements
  Fraud risk factors – conditions that could heighten an auditor’s concern about risk of
The most serious types of fraud usually involve management. This results from the material misstatements because they provide clues or red flags to the existence of
fact that management is primarily responsible for the design and implementation of fraud
internal control in the first place.
 
Fraudulent financial reporting may be accomplished by:
a.) Manipulation, falsification, or alteration of accounting records or related
supporting documents
b.) Misrepresentation in, or intentional omission from, the FS of events/transactions
or other significant information
c.) Intentional misapplication of accounting principles

Manipulation of financial statements occurs when a higher or lower level of earnings

is reported than that which occurred. It could also take the form of omissions
(failure to disclose certain matters) or false statements in the notes and/or other
disclosures. The motive may be to raise finances, reach a bonus threshold, inflate
the value of the business or simply minimize taxes.

Examples of techniques used by management are:
a. Recording fictitious journal entries
b. Using inappropriate assumptions in accounting estimate
c. Untimely recognition in the FS of events and transactions
d. Concealing, or not disclosing, facts that could affect the amounts recorded in the
FS
1.Incentives/pressures – reasons to commit fraud. A pressure is often generated
by immediate needs (such as having significant personal debts or meeting an
analyst’s or bank’s expectations for profit) that
Examples:
 Management is under pressure to reduce earnings to minimize taxes
Management is under pressure to inflate earnings to secure bank financing
Meeting analyst’s or bank’s expectations for profit
Inflating the purchase price of the business
Meeting the threshold for a performance bonus
Having significant personal debts or poor credit
Trying to cover financial losses
 Being greedy or involved in gambling, drugs, and/or affairs
Being under undue peer or family pressure to succeed
Living beyond one’s means
Indications that noncompliance may have occurred:
 The entity is under investigation by government departments
 Payment of fines or penalties.

 Payments for unspecified services or loans to consultants, related parties,

1.Incentives/pressures – reasons to commit fraud. A pressure is often generated by
employees or government employees.
immediate needs (such as having significant personal debts or meeting an analyst’s
or bank’s expectations for profit) that  Sales commissions or agent's fees that appear excessive in relation to those
ordinarily paid by the entity or in its industry or to the services actually
2.) Opportunity (whether perceived or real) – Opportunity pertains to an individual’s
received.
perception that he can commit fraud and that it will not be detected. Potential
perpetrators who think they might be detected and charged with a criminal offense
would not likely to commit fraud. A poor corporate culture and a lack of adequate
internal control procedures can often create the confidence that a fraud could go
undetected

3.)Attitudes/rationalizations – fraud involves some rationalization to commit fraud

or the belief that a crime has not been committed

Considering compliance with laws and regulations:

 Non-compliance refers to acts of omission or commission by the entity being

audited, either intentional or unintentional, which are contrary to the
prevailing laws or regulations.

 The auditor should consider compliance with laws and regulations since
noncompliance by the entity with laws and regulations may materially affect
the financial statements. However, an audit cannot be expected to detect
noncompliance with all laws and regulations.

 Noncompliance is sometimes described as violations of law or regulations or

illegal acts.