AUDITOR’S

RESPONSIBILI
TY
 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 unintentional misstatements in the
financial statements, including the omission of an amount or a
disclosure, such as:

 Mathematical or clerical 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 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 misstatements in the financial statements.
 Types of FRAUD
There are two types of fraud that are relevant to
financial statement audit. Misstatements resulting from
fraudulent financial reporting and misstatements resulting
from misappropriation of assets.

1. Fraudulent Financial Reporting

2. Misappropriation of assets or Employee Fraud
 Manipulation, falsification or alteration of records or
documents.
 Misinterpretation in or intentional omission of the
effects of transactions from records to documents.
 Recording of transactions without substance.
 Intentional misapplication of accounting policies.
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 Embezzling receipts
 Stealing entity’s assets such as cash, marketable
securities, and inventory
 Lapping of accounts receivable
 Fraud involves motivation to commit it and a perceived opportunity
to do so. For example, an employee might be motivated to steal
company’s assets because this employee lives beyond his means. Also, a
member of management may be forced to manipulate the financial
statements in order to meet an overly optimistic projection. A perceived
opportunity to commit fraud may exist when there is no proper
segregation of duties among employees or when management believes
that internal control can be easily circumvented.

The primary factor that distinguishes fraud from error is whether the
underlying cause of misstatement in the financial statements is intentional
or unintentional. Although the auditor may be able to identify
opportunities for fraud to be perpetrated, it is often difficult, for the
auditor to determine intent, particularly in matters involving management
judgment, such as accounting estimates and the appropriate application of
accounting principles. Consequently, the auditor’s responsibility for the
detection of fraud and error is essentially the same.
 Responsibility of Management and
those Charged with Governance
The responsibility for the prevention and detection of fraud
and error rests with both management and those charged with
the governance of the entity. In this regard, PSA 240 requires:
 Management to establish a control environment and to
implement internal control policies and procedures
designed to ensure, among others, the detection and
prevention of and error.
 Individuals charged with governance of an entity to
ensure the integrity of an entity’s accounting and financial
reporting systems and that appropriate controls are in
place.
 Auditor’s
Responsibility
Although the annual audit of financial statements may act as
deterrent to fraud and error, the auditor is not and cannot be
held responsible for the prevention of fraud and error. The
auditor’s responsibility is to design the audit to obtain
reasonable assurance that the financial statements are free
from material misstatements, whether caused by error or
fraud.

1. Planning Phase
2. Testing Phase
3. Completion Phase
4. Consider the Effect on the Auditor’s Report
 Noncompliance with the Laws
and Regulation
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. Such acts include transactions entered into
by, or in the name of, the entity or on its behalf by its
management or employees. Common examples include:

 Tax evasion
 Violation of environmental protection laws
 Inside trading of securities
 Management
Responsibility
It is the management responsibility to ensure that
the entity’s operations are conducted in accordance
with laws and regulations. The responsibility for the
detection of noncompliance rests with management.
(PSA 250)
The following policies and procedures, among
others, may assist management in discharging its
responsibilities for the prevention and detection of
noncompliance:
 Monitoring legal requirements and ensuring that operating
procedures are designed to meet these requirements.
 Instituting and operating appropriate systems of internal
control.
 Developing publicizing and following a Code of Conduct.
 Ensuring employees are properly trained and understand the
Code of Conduct.
 Monitoring compliance with the Code of Conduct and acting
appropriately to discipline employees who fail to comply with
it.
 Engaging legal advisors to assist in monitoring legal
requirements.
 Maintaining a register of significant laws in which the entity
has to comply within its particular industry and a record of
complaints.
 Auditor’s
Responsibility
Although the annual audit of financial statements may act as
deterrent to fraud and error, the auditor is not and cannot be
held responsible for the prevention of fraud and error. The
auditor’s responsibility is to design the audit to obtain
reasonable assurance that the financial statements are free
from material misstatements, whether caused by error or
fraud.

1. Planning Phase
2. Testing Phase
3. Completion Phase
4. Consider the Effect on the Auditor’s Report
Examples of Risk Factors Relating to
Misstatements Resulting from Fraud
The fraud risk factors identified below are
examples of such factors typically faced by
auditor’s in a broad range of situations. However,
the fraud risk factors listed below are only
examples; not all of these factors are likely to be
present in all audits, nor is the list necessarily
complete. Furthermore, the auditor’s exercises
professional judgment when considering fraud risk
factors individually or in combination and whether
there are specific controls that mitigate the risk.
 Fraud Risk Factors Relating to Misstatements
Resulting from Fraudulent Financial Reporting
Fraud risk factors that relate to misstatements resulting from fraudulent
financial reporting may be grouped in the following three categories:
1. Management’s characteristics and influence over the Control
Environment.
2. Industry Conditions
3. Operating characteristics and financial stability

For each of these three categories, examples of fraud risk factors relating to
misstatements arising from fraudulent financial reporting are set out below.
4. Fraud risk factors relating to Management’s Characteristics and influence
over the Control Environment
5. Fraud risk factors relating to Industry Conditions
6. Fraud risk factors relating to operating characteristics and financial
 Fraud Risk Factors Relating to Misstatements
Resulting from Misappropriation of Assets

It can be grouped into the following categories:

1. Susceptibility of assets to Misappropriation
2. Controls

The extent of the auditor’s consideration of the fraud

risk factors in category 2 is influenced by the degree to
which fraud risk factors in category 1 are present.
3. Fraud risk factors relating to Susceptibility of assets
to misappropriation
4. Fraud risk factors relating to controls.
1. Fraud risk factors relating to Management’s
Characteristics and influence over the Control
Environment
2. Fraud risk factors relating to Industry Conditions
3. Fraud risk factors relating to operating characteristics
and financial stability