AUDITOR’S RESPONSIBILITY

Client’s Management - fair presentation of FSs in accordance with Financial Reporting Standards.

Auditor’s responsibility – design the audit to provide reasonable assurance of detecting material misstatements in the FS. These misstatements may emanate from:
a. Error
b. Fraud
c. Non-compliance with Laws and Regulations

 ERROR – refers to UNINTENTIONAL MISSTATEMENTS in the FSs, including the omission of an amount or disclosure, such as: Mathematical or clerical mistakes in the
underlying records and accounting data, incorrect accounting estimate arising from oversight or misinterpretation of facts, and/or mistake in the application of
accounting policies.
 FRAUD – refers to INTENTIONAL ACT by one or more individuals among management, those charged with the governance, employees, or third parties, involving the use
of deception to obtain an unjust or illegal advantage. In auditing, the auditor’s primary concerned with fraud is Fraudulent acts that cause a material misstatement in
the financial statements.

TYPES OF FRAUD THAT ARE RELEVANT TO FSs AUDIT

a. Fraudulent Financial Reporting (Management Fraud) – intentional misstatements or omissions of amount or disclosures in the FSs to deceive FSs users. (this may
involve: (a) manipulation, falsification or alteration of records or documents; (b) misrepresentation in or intentional omission of the effects from records or documents;
(c) records transactions w/out substance; (d) intentional misapplication of accounting policies.
b. Misappropriation of assets or employee fraud – involves theft of an entity’s assets committed by the entity’s employees. (embezzling receipts; stealing entity’s assets
such as cash, Marketable securities, and inventory; lapping of A/R). This fraud is often accompanied by false or misleading records or documents in order to conceal the
fact that the assets are missing.

*the auditor’s responsibility for the detection of fraud and error is essentially the same.

RESPONSIBILITY OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE (PSA 240)

Responsibility for the prevention and detection of fraud and errors - MANAGEMENT AND THOSE CHARGE WITH GOVERNANCE OF THE ENTITY.

PSA 240

o Management – establish a control environment and implement internal control policies and procedures designed to ensure the detection and prevention of fraud and
error.
 o Individual charged with governance - -ensure the integrity of entity’s accounting and financial reporting systems and that appropriate controls are placed.

NON-COMPLIANCE WITH LAWS AND REGULATIONS

Non-compliance – refers to acts of omission or commission by the entity being audited, either intentional or unintentional, w/c are contrary to the prevailing law or regulations.
It includes transactions entered into by, or in the name of the entity or on its behalf by its management or employees. (Tax evasion, violation of environmental protection laws,
and/or inside trading of securities).

- Management’s responsibility – ensure that the entity’s operations are conducted in accordance with laws and regulations. The responsibility for the prevention and
detection of non-compliance rests with management.
- In prevention and detection of noncompliance, the following policies and procedures may assist management in discharging its responsibilities.
a. Monitoring legal requirements and ensuring that operating procedures are designed to meet these requirements.
b. Instituting and operating appropriate systems of internal control.
c. Develop and publicize Code of conduct.
d. Make sure employees are trained and understand the Code of Conduct.
e. Monitor employees’ compliance with the Code of Conduct, and make appropriate actions to employees who failed to comply with the Code of Conduct.
f. Engage legal advisor/s that will help in monitoring legal requirements.
g. Maintain a register of significant laws with w/c the entity has to comply within its particular industry and a record of complaints.

AUDITOR’S RESPONSIBILITY
ERRORS/FRAUDS
- Design the audit to obtain reasonable assurance
that the financial statements are free from
material misstatements, whether caused by
error or fraud.
PLANNING PHASE 1. Auditor makes inquiries of management about
the possibility of misstatements due to fraud and
error. (management’s assessment of risk,
control established by management to address
the risk, and material error or fraud that has
affected the entity or suspected fraud that the
entity is investigating).
NON-COMPLIANCE WITH LAWS AND REGULATIONS
- An audit cannot be expected to detect
noncompliance with all laws and regulations.
Nevertheless, auditor should recognize that non-
compliance by the entity with laws and
regulations may materially affect the financial
statement.
1. Obtain understanding of the legal and
regulatory framework applicable to the entity
and the industry and how the entity is
complying with that framework.
To obtain understanding of Laws and
Regulations, the auditor would ordinarily:
 2. Auditor should assess the risk that fraud or error
the FSs to contain material misstatements. PSA
240 “assess the risk of material misstatements
due to fraud and consider that assessment in
designing the audit procedures to be
performed.
TESTING PHASE 3. During the course of audit, the auditor may
encounter circumstances that may indicate the 4) evaluate the possible effect on the financial
possibility of fraud or error.
4. After identifying material misstatements in the the auditor should consider:
FSs, the auditor should consider whether such a
misstatement resulted from fraud or an error.
 Use the existing knowledge of the entity’s
industry and business
 Inquire of management concerning the
entity’s policies and procedures regarding
compliance w/ laws and regulations.
 Inquire of management as to the laws or
regulations that may be expected to have
a fundamental effect on the operations of
the entity.
 Discuss with the management the policies
or procedures adopted for identifying,
evaluating and accounting for litigation
claims and assessments.
 Discuss the legal and regulatory
framework with auditors of subsidiaries
in other countries (for example, if the
subsidiary is required to adhere to the
securities regulations of the parent
company)
2. Design procedures to help identify instances of
noncompliance with those laws and regulations
where noncompliance should be considered
when preparing financial statements.
3. Design audit procedures to obtain sufficient
appropriate audit evidence about compliance
with those laws and regulations generally
recognized by the auditor to have an effect on
the determination of material amounts and
disclosures in financial statements.
statements. When evaluating possible effect on the FSs,
 The potential financial consequences (fines,
penalties, damages, threat of expropriation of
This is important because errors will only result
to an adjustment of FSs but fraud may have
other implication.
If the auditor believes or if it may be resulted to
a fraud but with immaterial effects on FSs, the
auditor should:
assets, enforced discontinuation of operations
and litigation)
 Whether the potential Financial Consequences
require disclosure.
 Whether the potential-financial consequences
are so serious as to call into question the fair
presentation given by the FSs.

o Refer the matter to the appropriate level

of management at least one level above 5. If it believes that there may be non-compliance,
those involved, and you (auditor) should document the findings,
o Be satisfied that, given the position of discuss with the mgt., and consider the
the likely perpetrator, the fraud has no implication on other aspects of the audit.
other implications for other aspects of
the audit or that those implications have
been adequately considered.

However, if the auditor detects a material

fraud or has been unable to evaluate whether
the effect on FSs is material or immaterial, the
auditor should:

o Consider implication for other aspects of

the audit particularly the reliability of
management representations.
o Discuss the matter and the approach to
further investigation with an appropriate
level of that is at least one level above
those involve,
o Attempt to obtain evidence to determine
whether a material fraud in fact exist and
if so, their effect to the FSs, and
o Suggest that the client consult with legal
counsel about questions of law
COMPLETION PHASE 6. The auditor should obtain a written 6) the auditor should obtain written representations
representation from client’s management that that mgt. has disclosed to the auditor all known actual
o It acknowledges its responsibility for the or possible noncompliance with laws and regulations
implementation and operations of that could materially affect the FSs.
accounting and internal control systems
that is designed to prevent and detect
fraud and error.
o It believes the effects of those
uncorrected FS misstatements
aggregated by the auditor during the
audit are immaterial, both individually
and in the aggregate, to the FSs taken as
a whole.
o It has disclosed to the auditor all the
significant facts relating to any frauds or
suspected frauds known to mgt. that may
have affected the entity; and

CONSIDER THE EFFECT ON THE AUDITOR’S REPORT
7. When the auditor believes that material error or
fraud exists, he/she should request the
management to revise the FSs, otherwise it
would be a qualified or an adverse opinion to be
expressed.
8. If the auditor is unable to evaluate the effect of
fraud of the FSs because of a limitation of scope
of the auditor’s examination, the auditor should
either qualify or disclaim his opinion of the FSs.
 When the auditor believes that there is
noncompliance with laws and regulations
that materially affects the FSs, he/she
should request the management to revise
the FSs, otherwise it would be a qualified
or an adverse opinion to be expressed.
 Scope of limitation – (qualified opinion or
disclaimer of opinion)