AUDITOR’S RESPONSIBILITY

• Intentional misapplication of accounting

The fair representation of the financial statements in policies
accordance with the applicable financial reporting
standards is the responsibility of the client’s b. Misappropriation of assets or employee fraud
management. involves theft of an entity’s assets committed
by the entity’s employees.
The auditor’s responsibility is to design the audit to
provide reasonable assurance of detecting material
misstatements in the financial statements.

✓ The auditor should make inquiries of management

including assessment of risks due to fraud,
The
controls established to address the risks, and any Fraud
material error or fraud that has affected the entity
or suspected fraud that the entity is investigating
Triangle

✓ During the course of the audit, the auditor may

encounter circumstances that may indicate the
possibility of fraud or error

✓ After identifying material misstatements in the FS,
the auditor should consider whether such a
misstatement resulted from a fraud or an error
✓ The auditor should obtain a written representation
from the client’s management
The misstatements may emanate from:
1. Error – 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
Responsibility of Management and Those
Charged with Governance
The responsibility for the prevention and detection of
fraud and error rests with both:
• Management to establish a control environment
and to implement internal control policies and
procedures designed to ensure the detection and
prevention of fraud and error.
• Those charged with governance to ensure the
integrity of an entity’s accounting and financial
reporting systems and that appropriate controls
are in place.

2. Fraud – refers to 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. Although fraud is a broad
legal concept, the auditor is primarily concerned
with fraudulent acts that cause a material
misstatement in the financial statements.

a. Fraudulent financial reporting involves

intentional misstatements or omissions of
amounts or disclosures in the financial
statements to deceive FS users. This type of
fraud is also known as management fraud
because it usually involves members of
management or those charged with
governance:

• 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