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Auditors

Responsibility

Balquin, Anne Marjorie B.


Vallespin, April Rose V.

Responsibilities

Clients Management- fair presentation of


FS
Auditor- design the audit to provide
reasonable assurance of detecting material
misstatements which may emanate from:
Error
Fraud
Noncompliance with Laws and Regulations

Error

Unintentional misstatements
the financial statements

in

Error

an amount or

Omission of
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

Intentional act by one or more


individuals among management, those
charged with governance, employees
or third parties, involving the use of
deception to obtain unjust or illegal
advantage.

Types of Fraud

1. Fraudulent
Financial
(Management Fraud)

reporting

2. Misappropriation of Assets or Employee


Fraud

Responsibility of
Management and those
Charged with
Governance

Management

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


ensure the integrity of an entitys accounting
and financial reporting systems and that
appropriate controls are in place.

Auditors
Responsibility

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. When planning an audit, the auditor


should make inquiries of management
about the possibility of misstatements
due to fraud and error.
2. The auditor should assess the risk that
fraud or error may cause the financial
statements
to
contain
material
misstatements.

Testing Phase

3. During the course of the audit, the


auditor may encounter circumstances
that may indicate the possibilities of
fraud or error. The auditor should
perform procedures necessary to
determine
whether
material
misstatements exist.
4. The auditor should consider whether
such misstatement resulted from a
fraud or an error.

Testing Phase

If the auditor believes that the misstatements


may be a result of fraud and the effect is not
material, the auditor should:
Refer the matter to the appropriate level of
management at least one level above those
involved.
Be satisfied that, given the position of the likely
perpetrator, the fraud has no other implications
for other aspects of the audit or that those
implications have been adequately considered.

If the auditor detects a material fraud or has


been unable to evaluate whether the effect on
the
financial
statement
is
material
or
immaterial, the auditor should:

Consider implication for other aspects of the audit


particularly the reliability of management
representations.
Discuss the matter and the approach to further
investigation with an appropriate level of that is at
least one level above those involved.
Attempt to obtain evidence to determine whether
a material fraud in fact exists and, if so their effect
Suggest that the client consult with legal counsel
about question of law.

Completion Phase

should

5. The auditor
obtain a written
representation from the clients management
that:
It acknowledges its responsibility for the
implementation and operations of accounting
and internal control systems that are designed
to prevent and detect fraud and error;
It believes the effects of those uncorrected
financial statement misstatements aggregated
by the auditor during the audit are immaterial,
both individually and in the aggregate, to the
financial statements taken as a whole.

Completion Phase

It has disclosed to the auditor all significant


facts relating to any frauds or suspected
frauds known to management that may
have affected the entity, and
It has disclosed to the auditor the results of
its assessment of the risk that the financial
statements may be materially misstated as
a result of fraud.

Effect on the
Auditors
Report

6. When the auditor believes that material error


or fraud exists, he should request the
management
to
revise
the
financial
statements. Otherwise, the auditor will
express a qualified or adverse opinion.
7. If the auditor is unable to evaluate the effect
of fraud on the financial statements because
of the limitation on the scope of the auditors
examination, the auditor should either qualify
or disclaim his opinion on the financial
statements.

Risk Factors Relating to


Misstatements Resulting
from Fraud

1. Managements
Characteristics
and
Influence over the Control Environment
2. Industry Conditions
3. Operating Characteristics and Financial
Stability

Managements
Characteristics and
Influence over the Control
Environment

Managements abilities, pressures, style,


and attitude relating to internal control and
the financial reporting process.

Industry
Conditions

These fraud risk factors involve the


economic and regulatory environment
in which the entity operates.

Operating
Characteristics and
Financial Stability

These fraud risk factors pertain to the nature


and complexity of the entity and its transactions,
the entitys financial condition, and its
profitability.

Fraud Risk Factors


from Misappropriation
of Assets

1. Susceptibility
of
Misappropriation
2. Controls

Assets

to

Susceptibility of
Assets to
Misappropriation

These fraud risk factors pertain to the nature


of an entitys assets and the degree to which
they are subject to theft.

Controls

These fraud risk factors involve the lack of


control designed to prevent or detect
misappropriation of assets.

Noncompliance with
Laws and Regulations

Acts of omission of commission by the entity


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

Noncompliance with
Laws and
Regulations
Includes transactions entered into by, or in the
name of, the entity or on its behalf by its
management or employees, such as:
Tax evasion
Violation of environmental protection laws
Inside trading of securities

Managements
Responsibility

Ensure that the entitys operations are


conducted in accordance with laws and
regulations
Prevention and detection of noncompliance
rests with management (PSA 250)
In larger entities, policies and procedures may
be supplemented by assigning appropriate
responsibilities to an internal audit function an
audit committee.

Auditors
Responsibility

Recognize that noncompliance by the entity


with laws and regulations may materially
affect the financial statements.

Planning Phase

1. Obtain general understanding of the legal


and regulatory framework applicable to the
entity and the industry and how the entity is
complying with that framework.
2. The auditor should design procedures to help
identify instances of noncompliance with
those laws and regulations where
noncompliance should be considered when
preparing financial statements.

Planning Phase

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.

Testing Phase

4. The auditor should obtain an understanding


of the nature of the act and the
circumstances in which it has occurred, and
sufficient other information to evaluate the
possible effect on the financial statements.
5. The auditor should document the findings,
discuss them with management, and consider
the implication on other aspects of the audit.

Completion
Phase

The auditor should obtain written


representations that management has
disclosed to the auditor all known
actual or possible noncompliance with
laws and regulations that could
materially affect the financial
statements.

Effect on the
Auditors
Report

7. Noncompliance- The auditor should request


the management to revise the financial
statements. Otherwise, a qualified or adverse
opinion will be issued.
8. The auditor should express a qualified opinion
or a disclaimer of opinion if a scope limitation
has precluded the auditor from obtaining
sufficient appropriate evidence.