AUDITOR’S

RESPONSIBILITY
Chapter III
Learning Objectives:
• Understand the responsibility of the auditor with regard
to fraud, errors and noncompliance of laws and
regulations.
• Cite
the differences of the responsibilities of the
management and those charged with governance.
• Understand the Fraud Risk Factors.
Auditor’s Responsibility
• The fair presentation of the financial statements in
accordance with the applicable financial reporting
standards is the responsibility of the client’s management.
The auditor’s responsibility is to design the audit to
provide reasonable assurance of detecting material
misstatements in the financial statements. These
misstatements may emanate from:
• Error
• Fraud, and
• Noncompliance with Laws and Regulations
ERROR
• The term “error” refers to the unintentional
misstatements in the financial statements,
including the omission of an amount or a
disclosure, such as:
• Mathematical or clerical mistakes in the underlying
records and accounting data
• An incorrect accounting estimate arising from
oversight or misinterpretation of facts
• Mistake in the application of accounting policies
FRAUD
• It refers to intentional act by one or more
individuals among the management, those
charged with governance, employees, or third
parties, involving the use of deception to obtain
an unjust or illegal advantage. (Ex. Theft,
corruption, manipulation, misrepresentation)
• Auditors primarily concerned with fraudulent
acts that cause a material misstatement in the
financial statements.
TYPES OF FRAUD
1. Fraudulent Financial Reporting
• Involves intentional misstatements or omissions of amounts or
disclosures in the financial statements to deceive financial
statements.
• It is also known as MANAGEMENT FRAUD.
EXAMPLES:
• Manipulation, falsification or alteration of records or documents
• Misrepresentation in or intentional omission of the effects of
transactions from records or documents
• Recording of transactions without substance
• Intentional misapplication of accounting policies.
TYPES OF FRAUD
2. Misappropriation of assets or employees fraud
• It involves theft of an entity’s assets committed by
the entity’s employees. This may include
• Embezzling receipts
• Stealing entity’s assets such as cash, marketable securities,
and inventory
• Lapping of accounts receivable
• This fraud is often accompanied by false or misleading
records or documents in order to conceal the fact that the
assets are missing.
Responsibility of Management and
Those Charged with Governance
Management
• To establish a control environment and to implement
internal control policies and procedures designed to
ensure, among others, the detection and prevention of
fraud and error.
Individuals charged with Governance
• To ensure the integrity of an entity’s accounting and
financial reporting systems and that appropriate
controls are in place.
FRAUD RISK FACTORS

OPPORTUNITY

FRAUD
ATTITUDE
INCENTIVE &
&
PRESSURE
RATIONALIZATION
DETECTION RISK
• The risk of not detecting material misstatement
due to fraud is higher than due to error
• The risk of not detecting material misstatement
due to management fraud is higher than
employee fraud
AUDITOR’S OBJECTIVE
A. Objectives in relation to fraud
• Identify and assess risk of material misstatement due
to fraud
• Obtain sufficient appropriate evidence through
designing and implementing appropriate responses
• Respond appropriately to identified or suspected fraud
PROFESSIONAL SKEPTICISM
a. Professional Skepticism
• Questioning mind and critical assessment
• Management is neither honest nor dishonest
• Records and documents are presumed to be genuine

b. Professional Judgment
• Application of relevant training, professional
knowledge, skills and experience in making decisions.
DISCUSSION AMONG THE TEAM
a. Discussion among the engagement partner and key
audit members
• Susceptibility to material misstatements due to fraud
• Indications of earnings management
• External and internal fraud risk factors
• Audit procedures to respond to susceptibility to fraud
• Allegations of fraud
RISK ASSESSMENT PROCEDURES
a. Inquiries of Management
• Assessment of risk of material misstatements due to fraud
• Inquiries of knowledge of actual, suspected or alleged
fraud
Those Charged with Governance and Internal Auditor
• Inquiries of knowledge of actual, suspected or alleged
fraud
a. Analytical Procedures
b. Evaluation of Fraud Risk Factors
IDENTIFICATION AND ASSESSMENT
a. Identify and assess the risk of material
misstatements due to fraud by setting a
materiality level
b. Risk of fraud of Revenue Recognition
c. Understanding Entity’s Control
RESPONSES TO ASSESSED RISK
a. Overall Responses
• Assignment and supervision of personnel
• Evaluate accounting policies
• Element of unpredictability

b. Responses to Risk at the Assertion Level

• Changing the nature, timing and extent of procedures

c. Response to Risk of Management Control Override

• Test the appropriateness of journal entries and adjustments
• Reviewing accounting estimates for biases
• Evaluating the business rationale for significant unusual transactions
EVALUATION OF AUDIT EVIDENCE
a. Analytical procedures results are consistent with auditor’s
understanding
b. Are misstatement due to fraud?
c. Reevaluate risk assessment if risk management fraud is
suspected
d. Evaluate implications if auditor is unable to conclude
whether FS is materially misstated
 WITHDRAWAL FROM ENGAGEMENT
Identified fraud or suspected fraud?
a. Determine professional and legal responsibility
b. Consider whether withdrawal is appropriate and
legally permitted

• Discuss with management and those charged with governance

• Determine reporting responsibilities
MANAGEMENT REPRESENTATIONS
a. Obtain written representations that Management
• Acknowledges its responsibilities to prevent and detect
fraud
• Discloses its assessment of risk of material
misstatements due to fraud
• Discloses known and suspected fraud
• Discloses allegations of fraud
COMMUNICATIONS TO CLIENT
a. Communications with Management
• Suspected or detected fraud to appropriate level of
management
b. Communication with those Charged with
Governance
• Suspected or detected management fraud and those result to
material misstatements
• Inquire about known or suspected fraud, and senior
management’s integrity and competence.
NONCOMPLIANCE WITH LAWS AND
REGULATIONS
• Noncompliance 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. Common
examples include:
• Tax evasion
• Violation of environmental protection laws
• Inside trading securities
Auditors’ Responsibility
1. Auditor should obtain a general understanding of the
legal and regulatory framework.
2. They should design procedures to help identify instances
of noncompliance.
3. They should obtain sufficient appropriate audit evidence
about compliance with those laws and regulations.
4. They should evaluate the possible effect on the financial
statements.
Auditors’ Responsibility
5. They should document the findings, discuss them with
management, and consider the implication on other aspects of the
audit.
6. They should obtain written representations that management has
disclosed to the auditor all known actual or possible
noncompliance with laws and regulations.
7. If auditor believes noncompliance affects materially the financial
statements, he should request to revise the FS or issue a qualified
or adverse opinion.
8. If a scope limitation has precluded to auditor, the auditor should
express a qualified opinion or a disclaimer of opinion.