The auditor’s responsibilities relating to fraud in

An audit of financial statements (isa 240) ( Revised)

Some General Considerations of SA 240 (R)
 Management’sTCWG Responsibility: (Those Charged with Governance).
 Bear the primary responsibility for the prevention and detection of fraud*.
 Committed to create a culture of honesty and ethical behaviour in the entity.

 Auditor’s Responsibility:
 To obtain reasonable assurance that the financial statements taken as a whole
arefree from material misstatements.
 Unavoidable Risk of *Material Misstatements:

 *A material misstatement is information in the financial statements that is

sufficiently incorrect that it may impact the economic decisions of someone
relying on those statements.
 As per SA 200 (R) due to the inherent limitations of an audit, there remains
an Unavoidable risk that some material misstatements in the financial
statements may remain undetected, even though the audit is properly
planned and performed.

* Definition of Fraud: It is the intentional act by one or more individuals among

management, TCWG, employees or third parties, involving deception to obtain
an unjust or illegal advantage.
 Risk (Fraud) > Risk (Error):
The risk of material misstatements arising from undetected frauds is greater than
the risk arising from undetected error.
 Risk (Management Fraud) > Risk (Employee Fraud):
The risk of material misstatements arising from not detecting management fraud is
higher than the risk
arising from not detecting employee fraud. Management frauds are more difficult
to detect because:
 Their position presupposes their honesty and integrity.
 They can manipulate accounting records.
 They can override internal controls.

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Areas involving Judgment: It is very difficult for the auditor to determine whether
Misstatements in judgment area such as accounting estimates are caused by error
or fraud.
 Objectives of SA 240 (R)

 Identification and Assessment of Fraud Risk:

To identify and assess the risk of material misstatements in the financial
statements due to fraud.
 Obtain Audit Evidence:
To obtain sufficient appropriate evidence about assessed risks of material
misstatements due to fraud.
 Response: To respond appropriately to suspected fraud.
 Auditor’s Duty
1) Maintain Professional *Skepticism.
*Professional scepticism is an attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a
critical assessment of audit evidence.

2) Discuss among Engagement Team.

3) Carry out Risk Assessment Procedures (RAP), including:

 Enquiries of Management (and others within the entity).
 Enquiries of TCWG.(Those charged with Governance)
 Evaluate Unusual or Unexpected Relationships Identified.
 Consider Other Information.
 Evaluate Fraud Risk Factors.

4) Ientify and Assess Risk of Material Misstatements specially due to

fraud.
 Evaluate Audit Evidence.

5: Respond to Assessed Fraud Risk.

 Obtain Management Representation.
 Consider Disengaging.
 Communicate to Management/TCWG.
 6. Critical Evaluation of Audit Evidence

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  Communicate to Regulatory Authorities
 Documentation.
6. Critical Evaluation of Audit Evidence

7. Obtain Management Representation

8:The Effect of Fraud and Error on Audit Report
9. Communication with Management/ TCWG
10. Communication with Regulatory Authorities

Point wise Explanation

1. Maintain Professional Skepticism
It is an attitude of the auditor that represents a questioning mind and a critical
assessment of audit evidence. Specifically:
 The auditor considers the possibility of fraud, despite prior experience of
honesty and integrity of the management
 In the absence of doubtful/suspicious situations auditor may accept records
and documents as genuine.
 If conditions cause the auditor to believe that a document may not be
authentic or that the terms the document may have been modified, the
auditor shall detect further.
 Where responses to inquiries of management/TCWG are
inconsistent, the auditor shall investigate the inconsistencies.
2. Discussion of Audit Planning among the Engagement Team
 How and where, financial statements may contain frauds.
 Possibility and suspicion of material misstatements.
 Job allocation among audit team.
 How results of the audit procedures followed by the audit team are to
be shared among themselves

3.Risk Assessment Procedures

(a) Inquiries of management and others within the entity:
(i) Management’s knowledge of:
1. frauds discovered,
2. suspected frauds under investigation,
3. material errors discovered, and
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4. weaknesses in control procedures (if any).
(ii) Management’s assessment of fraud risk.
(iii) Obtain understanding and design of accounting and internal control systems.
(iv) If the entity has an internal audit function: Whether theinternal auditor has
identified:
1. Any fraud or
2. any serious internal control weaknesses.
(v) How management communicates to employees its views
on responsible business practices and ethical behaviour, such as
ethics policies or codes of conduct.
(b) Enquiries of TCWG are:
(1) How TCWG supervise the management process.
2) Whether TCWG has any knowledge of any fraud or internal control weaknesses.
[TCWG includes:
1. Audit Committees,
2. Remuneration Committee,
3. Shareholder’s Grievance Committee,
4. Board of Directors,
5. Independent Directors, 6. Executive Committee, etc.]
4. Identify and Assess Risks of Material Misstatements Due to Fraud
as per SA 315
5. Respond to Assessed Fraud Risks
 Overall Responses:
 Assign and Supervise personnel as per their capability.
 Determine whether the management has tried to manage earnings by
misapplication of accounting policies.
 Incorporate surprise element in the NTE of audit procedures.

Responses at the *Assertion Level.

The level at which statements are presented as completely true.
Management tells the auditor the financial statements show a true
valuation of inventory – management are formally “asserting” this
statement as being correct, so we call this at the “assertion level”

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 The following five items are classified as assertions related to the presentation
of information within the financial statements, as well as the accompanying
disclosures:
 Accuracy. ...
 Completeness. ...
 Occurrence. ...
 Rights and obligations. ...
 Understandability.
Th auditor should design anhd perform further audit procedures whose
*NTE are Responsive to assessed Risks of Fraud.

 *Nature, timing and extent of Audit procedures. ...

If Auditor determines high risk related to financial statement, He
should extent his audit procedures and obtain more
persuasive audit evidences to bring the level of assurance

6. Critical Evaluation of Audit Evidence

Check whether the results of Analytical Procedures are
consistent with the auditor’s understanding of the
entity and its environment.
 On identifying misstatements , enquire the following:
 Is it due to fraud (or error)?
 Are Management Representations Reliable?
 Reassess Risk of material Misstatements due to fraud.
 Consider impact on the NTE of audit procedures.
 When fraud is confirmed or its possibility cannot be
ruled out, consider the implications of the same for the
audit.
7. Obtain Management Representation
 Acknowledgement for responsibility regarding Internal
Controls.
 Any uncorrected misstatement, considered as not material
by the management.
 That the management has disclosed all facts relating to
suspected frauds.
 Discussions with Auditor.

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8:The Effect of Fraud and Error on Audit Report
 Whether the auditor can confirm his suspicion or is
unable to confirm (but not dispel) suspicion, the effect
of either situation will be reflected in the Auditor’s Report.
 For this, consider:
Materiality Aspect [SA 320 (R)]
 Effect on Auditor’s Report [SA 700 (R)]
 Effect on Auditor’s Report:
 Effect not material: QUALIFIED OPINION
 Suspicion Confirmed: ADVERSE OPINION
 Suspicion neither confirmed nor dispelled: DISCLAIMER OF
OPINION.
9. Communication with Management/ TCWG

 Bring the following to the attention of the management/TCWG:

 Misstatements resulting from ERRORS.
 Misstatements resulting from FRAUDS.
 Material Weaknesses in Internal Control System.
 When the top management/TCWG are not involved in fraud:
 Report the matter generally to a level of management higher than the
one committing the fraud.
 When the top management/TCWG are involved in fraud
 Seek Legal Advice.
10. Communication with Regulatory Authorities