Auditor Responsibilities for Fraud

• This document describes certain auditor responsibilities related to fraud.

Scope of International Auditing Standards (NIA)

• NIA addresses the auditor's responsibilities regarding fraud in financial statement audits.
• It provides guidance to apply NIA 315 (Revised) and NIA 330 concerning risks of material misstatement due to fraud.

Characteristics of Fraud

• Misstatements in financial statements can arise from fraud or error.
• Fraud is distinguished from error based on whether the underlying action is intentional or unintentional.
• "Fraud" is a broad legal concept, but for auditors, it means acts leading to material misstatements in financial statements.
• Two types of intentional misstatements are relevant: misstatements from fraudulent financial reporting and those from misappropriation of assets.
• Auditors may suspect or even identify fraud, but they do not determine if fraud has occurred legally.

Responsibilities for Fraud Prevention and Detection

• Governance and management are primarily responsible for fraud prevention and detection.
• Management, overseen by governance, should emphasize fraud prevention.
• Prevention reduces opportunities for fraud, and dissuasion discourages it due to detection and punishment risks.
• Creating a culture of honesty and ethical behavior, reinforced by active oversight, is important.
• Governance includes considering controls circumvention and improper influences on financial reporting, such as attempts to manipulate results to influence perceptions of company performance.

Auditor's Responsibility

• Auditors conducting NIA-compliant audits must obtain reasonable assurance that financial statements are free from material misstatements caused by fraud or error.
• Audits have inherent limitations, meaning some material misstatements may not be detected even when properly planned and executed.
• The potential effects of inherent limitations are significant, particularly for fraud-related misstatements
• The risk of not detecting fraud-related misstatements is higher than that of errors.
• Fraud can involve sophisticated and carefully organized schemes, like falsification, deliberate omission, or intentional misrepresentations to auditors.
• Collusion can make concealment more difficult to detect, possibly misleading the auditor into thinking audit evidence is reliable when it is, in reality, false.
• Factors such as the perpetrator's skill, manipulation frequency and scope, collusion level, amount of individual manipulations, and people involved determine fraud detection ability.
• An auditor can identify potential fraud opportunities but may struggle to determine if inaccuracies are due to fraud vs honest mistakes, especially when judgement is required, like with accounting estimates.
• The risk of auditors missing material misstatements from management fraud is greater than from employee fraud.
• Management can directly or indirectly manipulate accounting records, provide fraudulent information, and override controls.
• During the process of gaining reasonable assurance, maintaining professional skepticism is key, considering the possibility of controls being circumvented and detecting errors may differ from detecting fraud.
• The document's NIA requirements help auditors identify and assess risks of material misstatement due to fraud and design procedures to detect such misstatements.

Effective Date

• This document's NIA applies to financial statement audits for periods beginning on or after December 15, 2009.

Objectives of an Auditor

• Identify and assess the risks of material misstatement in the financial statements due to fraud.
• Obtain sufficient and appropriate audit evidence regarding the assessed risks of material misstatement due to fraud through designing and implementing relevant responses.
• Respond appropriately to fraud or indications of fraud identified during the audit.

Definitions

• Fraud means an intentional act by one or more individuals among management, those charged with governance, employees, or third parties involving deception to obtain an unjust or illegal advantage.
• Risk factors of fraud means events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to do so.

Requirements for Professional Skepticism

• Maintain a professionally skeptical attitude throughout the audit, acknowledging that material misstatement due to fraud may exist, despite prior experience with management and governance's honesty and integrity.
• Unless having reason to believe otherwise, the auditor can accept records and documents as authentic.
• Investigate thoroughly if conditions identified during the audit lead them to suspect document authenticity or undisclosed modifications.
• Investigate inconsistencies if responses to inquiries of management or governance are incongruent.

Discussion Among Engagement Team Members

• NIA 315 (Revised) requires discussing the potential for misstatement due to fraud and how fraud might occur.
• The lead partner determines communication matters with team members who don't partake in discussions.
• Discussions emphasize the susceptibility of an entity's financial statements to material misstatement due to fraud and items that could be affected, without regard to opinions on management's honesty and integrity.

Risk Assessment Procedures and Related Activities

• An auditor applies risk assessment procedures and related activities to obtain understanding of the entity and its environment, including its internal control, as required by NIA 315 (Revised).
• The auditor applies procedures outlined in paragraphs 17-24 to obtain information for identifying risks of material misstatement due to fraud.

Inquiry of Management

• Enquire about the process for assessing the risk of fraudulent financial statements, including nature, extent and frequency of assessments.
• Also, enquire about risk responses taken, specific risks management has been made aware of, and transaction types, accounts, or disclosures subject to risk of fraud.
• Inquire about management communications, if pertinent, with the entity's governance regarding processes to identify and respond to fraud risks.
• Also inquire about management's communications, if applicable, to employees about its views on business practices and ethical behavior.
• Inquire of other that the entity's management, where appropriate, about the existence of fraud, indications of fraud, or fraud reports.
• Inquire with proper function people with entities that have an internal audit function to determine the existence of any indication of fraud.

Governance Responsibilities

• Unless all involved in governance take part in management, the auditor should understand how governance monitors management's processes to address fraud risks and assess related internal controls.
• Auditors will question the administration group, unless they are all in management, to establish whether they know of any type of fraud, indication of fraud, or claimed fraud.
• The answers acquired throughout these investigations will be looked at for corruption as against those acquired from management inquiries.

Identifying Unusual or Unexpected Relationships

• Auditors should assess whether any unusual or unexpected relationships might indicate a risk of material misstatement due to fraud if they were identified by using analytic procedures.

Assessing Risk Factors

• The auditor will assess whether the obtaining information and related risk evaluation activities show one or several risk fraud factors.
• Fraud risk factors often exist in situations in which a business has been prosecuted, so they may indicate risks of material misrepresentation, even though they do not necessarily show fraudulent financial statements.

Fraud Risk Identification and Assessment of Material Misstatement

• The auditor uses NIA 315 (Revised) to identify and evaluate the risk of material misrepresentation attributable to fraud in financial statements.
• The auditor identifies and assesses risks of material misrepresentation.
• The auditor assesses revenue recognition, determines types of revenue and reviews specific earnings or certifications.
• The auditor documents their conclusion according specification in paragraph 47.
• The auditor should treat these evaluated risks of material misrepresentations attributed to fraud since these risks are essential.
• An auditor will be able to obtain the corresponding entity controls to a certain degree.

Responding to Assessed Risks of Material Misstatement Due to Fraud

• Auditors using NIA 330 should determine appropriate responses for measuring the risks of misstatement due to fraud in financial statements.
• The auditor determines what response to give, including their assessment of responsibilities, the way the body uses accountancy and its effects and the nature of time and scale. Also, the introduction of unexpected nature and extent of verification.

Responses to Risks Related to Management Override of Controls

• Management can manipulate accounting records and prepare fraudulent financial statements by overriding otherwise effective controls because of their ability to do so.
• The risk that management would override controls exists in all companies even though the extent may vary.
• Auditors must design and implement audit procedures to address this, regardless of their risk assessment.

Auditing Book Records and Other Adjustments

• Auditors need to determine whether records of the ledger in book are correct as well some other financial revisions.
• Auditors should conduct interviews with people involved in the process of financial data on unethical behaviour and pick which of the ledger recordings and changes have been completed.
• Auditors examine to determine if estimates in accounting are reliable, any biases are present, and if bias risks exist, auditors are urged to re-evaluate estimated data together with past figures.
• It is important to look at any exceptional transaction of business and test for any fraudulent intentions.

Evaluated Audit Evidence

• Auditors should ensure that their analytic approach used to make appropriate findings has been applied and accurately so.

Identified and Assessed Misstatements

• If a misstatement is located or suspected by an auditor, they should weigh its indications in line to other aspects which can contribute.
• They should also test results and reliability.
• If the auditor shows that the financial records have material mistakes that are caused by a crime, they need to assess the results of this matter on their examination.

Auditor's Inability to Continue the Engagement

• The auditor may locate extraordinary situations which question their degree of strength when handling any auditing process; therefore, a conclusion must be determined.
• In the form of documentation to comply with NIA 315, an auditor should record critical decisions when team members come across likelihood in financials.

Written Representations

• The auditor needs to gain the direction and charge with governance from the entity to ensure and provide evidence in which they are responsible designed and maintain internal fraud controlling.
• The entity and people understand fraud and any indication of fraud including the direction and employees of the entity to obtain any report for financial success.

Communications to Management and Governance

• The auditor should be sure there is already a scheme or any data showing that fraud is possible which the process can be quickly known during direction stage.
• The communication between an auditor within management or governance is recorded through writing including any means in a person's physical form, for example NIA 260.

Reports to Regulatory and Supervisory authorities

• An auditor must know that as a result of reporting suspected fraud there may be an indication in which to get in touch with other third parties.
• They should keep any confidential details hidden to prove whether the audit is valid.

Documentation

• An auditor must retain any important details and results throughout the evaluation in writing, so any party can ensure all decisions were accurately measured.
• Including the risk or fraud, control measures need be be known for reporting.