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THE AUDITORS
RESPONSIBILITIES
RELATING TO FRAUD IN
AN AUDIT OF
FINANCIAL STATEMENTS
(PSA 240)
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SCOPE OF THIS PSA
Characteristics of Fraud
Error
Unintentional
Fraud
Intentional
Misstatements
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Characteristics of Fraud
Incentive or
Pressure
Conditions generally
present when material
misstatements due to
fraud occur:
Fraud
Rationalizati
on
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Perceived
Opportunity
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SCOPE OF THIS PSA
Although Fraud is a broad concept, for the purposes of PSA, what
is the auditors concern?
Answer:
Fraud that Causes a Material Misstatement in the FS.
Two Types of Fraud:
Fraudulent Financial Reporting
Misappropriation of Assets
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Fraudulent Financial Reporting
Involves intentional misstatements including omissions of amounts
or disclosures in financial statements to deceive financial statement
users.
Fraudulent financial reporting may be accomplished by
the following:
Manipulation, falsification (including forgery), or alteration of
accounting records or supporting documentation from which
the financial statements are prepared.
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Misrepresentation in, or intentional omission from, the
financial statements of events, transactions or other
significant information.
Intentional misapplication of accounting principles relating
to amounts, classification, manner of presentation, or
disclosure.
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Misappropriation of Assets
Involves the theft of an entitys assets and is often perpetrated
by employees in relatively small and immaterial amounts.
Misappropriation of assets can be accomplished in a
variety of ways including:
Embezzling receipts (for example, misappropriating
collections on accounts receivable or diverting receipts in
respect of written-off accounts to personal bank accounts).
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Misrepresentation in, or intentional omission from, the financial statements
of events, transactions or other significant information.
Stealing physical assets or intellectual property (for example, stealing
inventory for personal use or for sale, stealing scrap for resale, colluding
with a competitor by disclosing technological data in return for payment).
Causing an entity to pay for goods and services not received (for example,
payments to fictitious vendors, kickbacks paid by vendors to the entitys
purchasing agents in return for inflating prices, payments to fictitious
employees).
Using an entitys assets for personal use (for example, using the entitys
assets as collateral for a personal loan or a loan to a related party).
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Responsibility for the Prevention and Detection of
Fraud
Who is/are the primary responsible for the prevention and
detection of fraud?
Answers:
Those Charged With Governance (TCWG)
Management
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SCOPE OF THIS PSA
Responsibilities of the Auditor
An auditor conducting an audit in accordance with PSAs is
responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error.
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SCOPE OF THIS PSA
Take note!
The risk of not detecting a material misstatement resulting from
fraud is higher than the risk of not detecting one resulting from
error.
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SCOPE OF THIS PSA
Take note!
The risk of not detecting a material misstatement resulting from
fraud is higher than the risk of not detecting one resulting from
error.
The risk of the auditor not detecting a material misstatement
resulting from management fraud is greater than for employee
fraud.
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SCOPE OF THIS PSA
Take note!
The risk of not detecting a material misstatement resulting from
fraud is higher than the risk of not detecting one resulting from
error.
The risk of the auditor not detecting a material misstatement
resulting from management fraud is greater than for employee
fraud.
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EFFECTIVE DATE
This PSA is effective for audits of financial statements for periods
beginning on or after December 15, 2009.
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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PROFESSIONAL SKEPTICISM
Is an attitude that includes a questioning mind and a critical
assessment of audit evidence.
Lets review
An audit performed in accordance with PSAs rarely involves the
authentication of documents, nor is the auditor trained as or
expected to be an expert in such authentication.
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PROFESSIONAL SKEPTICISM
But note
When the auditor identifies conditions that cause the auditor to
believe that a document may not be authentic or that terms in a
document have been modified but not disclosed to the auditor,
possible procedures to investigate further may include:
Confirming directly with the third party.
Using the work of an expert to assess the documents
authenticity.
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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DISCUSSION AMONG THE ENGAGEMENT
TEAM
Discussing the susceptibility of the entitys financial statements to
material misstatement due to fraud with the engagement team:
Provides an opportunity for more experienced engagement
team members to share their insights about how and where
the financial statements may be susceptible to material
misstatement due to fraud.
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DISCUSSION AMONG THE ENGAGEMENT
TEAM
Enables the auditor to consider an appropriate response
to such susceptibility and to determine which members of the
engagement team will conduct certain audit procedures.
Permits the auditor to determine how the results of audit
procedures will be shared among the engagement team
and how to deal with any allegations of fraud that may come to
the auditors attention.
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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RISK ASSESSMENT PROCEDURES AND
RELATED ACTIVITIES
The auditor shall perform the following procedures to obtain information for use in
identifying the risks of material misstatement due to fraud:
Inquiries of management and others within the entity
a)
Assessment of the risk that FS may have material misstatement due to fraud (also, ask
the nature, extent and frequency of assessment).
b) Process for identifying and responding to the risks of fraud.
c)
How management communicate with TCWG regarding its processes for identifying
and responding to the risks of fraud in the entity.
d) Managements communication, if any, to employees regarding its views on business
practices and ethical behavior.
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RISK ASSESSMENT PROCEDURES AND
RELATED ACTIVITIES
Inquiries of TCWG
Obtain an understanding of how those charged with
governance exercise oversight of managements processes for
identifying and responding to the risks of fraud in the entity
and the internal control that management has established to
mitigate these risks.
Evaluate whether there are Unusual or Unexpected
Relationships Identified
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RISK ASSESSMENT PROCEDURES AND
RELATED ACTIVITIES
Consider whether other information obtained by the
auditor indicates risks of material misstatement due to
fraud.
Evaluate Fraud Risk Factors
The auditor may identify events or conditions that indicate an
incentive or pressure to commit fraud or provide an opportunity
to commit fraud (fraud risk factors).
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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IDENTIFICATION AND ASSESSMENT OF THE
RISKS OF MATERIAL MISSTATEMENT DUE TO
FRAUD
Risks of Fraud in Revenue Recognition
Identifying and Assessing the Risks of Material Misstatement
Due to Fraud and Understanding the Entitys Related Controls
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement
Due to Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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RESPONSES TO THE ASSESSED RISKS OF
MATERIAL MISSTATEMENT DUE TO FRAUD
The auditor shall determine overall responses to address the
assessed risks of material misstatement due to fraud at the financial
statement level.
The auditor shall design and perform further audit procedures
whose nature, timing and extent are responsive to the assessed
risks of material misstatement due to fraud at the assertion level.
The auditor shall design and perform Audit Procedures
Responsive to Risks Related to Management Override of Controls.
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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EVALUATION OF AUDIT EVIDENCE
Why do we evaluate?
To evaluate whether the assessments of the risks of material
misstatement at the assertion level remain appropriate. This
evaluation is primarily a qualitative matter based on the auditors
judgment. Such an evaluation may provide further insight about
the risks of material misstatement due to fraud and whether there
is a need to perform additional or different audit procedures.
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Start
Evaluate whether the
analytical procedures
indicate a previously
unrecognized risk of
material misstatement
Is there
a
misstate
ment?
Indicative
of Fraud?
(Whether
material or
immaterial)
Yes
No
None
End
Yes
No
End
When the auditor confirms that, or is
unable to conclude whether, the
financial statements are materially
misstated as a result of fraud the
auditor shall evaluate the
implications for the audit.
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Evaluate implications of the
misstatement in relation to
other aspects of the audit
End
Reliability of management representations, recognizing that an
instance of fraud is unlikely to be an isolated occurrence.
Reevaluate the assessment of the risks of material misstatement
due to fraud and its resulting impact on the nature, timing and
extent of audit procedures to respond to the assessed risk
consider whether circumstances or conditions indicate possible
collusion involving employees, management or third parties
when reconsidering the reliability of evidence previously
obtained.
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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AUDITOR UNABLE TO CONTINUE THE
ENGAGEMENT
If there is a question on the auditors ability to continue performing the audit, the
auditor shall:
a) Determine the professional and legal responsibilities applicable in the
circumstances
b) Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted, and
c) If the auditor withdraws:
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i.
Discuss with the appropriate level of management and those charged with governance
the auditors withdrawal from the engagement and the reasons for the withdrawal;
ii.
Determine whether there is a professional or legal requirement to report to the person
or persons who made the audit appointment
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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MANAGEMENT REPRESENTATIONS
The auditor shall
management that:
obtain
written
representations
from
It acknowledges its responsibility for the design,
implementation and maintenance of internal control to prevent
and detect fraud;
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;
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MANAGEMENT REPRESENTATIONS
It has disclosed to the auditor its knowledge of fraud or
suspected fraud affecting the entity involving:
i. Management;
ii. Employees who have significant roles in internal control; or
iii. Others where the fraud could have a material effect on the financial
statements; and
It has disclosed to the auditor its knowledge of any allegations of
fraud, or suspected fraud, affecting the entitys financial
statements communicated by employees, former employees,
analysts, regulators or others.
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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COMMUNICATIONS TO MANAGEMENT AND
WITH THOSE CHARGED WITH GOVERNANCE
If the auditor has identified a fraud or has obtained information that
indicates that a fraud may exist, the auditor shall communicate these
matters on a timely basis to the appropriate level of management in
order to inform those with primary responsibility for the prevention
and detection of fraud of matters relevant to their responsibilities.
This involves identified or suspects of fraud from:
a. Management
b. Employees who have significant roles in internal control
c. Others where the fraud results in a material misstatement in the
financial statements
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material Misstatement Due
to Fraud
Responses to the Assessed Risks of Material Misstatement Due to Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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COMMUNICATIONS TO REGULATORY
AND ENFORCEMENT AUTHORITIES
If the auditor has identified or suspects a fraud, the auditor shall
determine whether there is a responsibility to report the
occurrence or suspicion to a party outside the entity. Although
the auditors professional duty to maintain the confidentiality of
client information may preclude such reporting, the auditors
legal responsibilities may override the duty of
confidentiality in some circumstances.
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REQUIREMENTS
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Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material
Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to
Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Management Representations
Communications To Management and With Those Charged With
Governance
Communications to Regulatory and Enforcement Authorities
Documentation
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DOCUMENTATION
Documentation of the understanding of the entity and its
environment and the assessment of the risks of material
misstatement required by ISA 315 shall include:
a) The significant decisions reached during the discussion among the
engagement team regarding the susceptibility of the entitys
financial statements to material misstatement due to fraud; and
b) The identified and assessed risks of material misstatement due to
fraud at the financial statement level and at the assertion level.
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DOCUMENTATION
Documentation of the responses to the assessed risks of
material misstatement required by PSA 330 shall include:
a) The overall responses to the assessed risks of material
misstatement due to fraud at the financial statement level and
the nature, timing and extent of audit procedures, and the
linkage of those procedures with the assessed risks of material
misstatement due to fraud at the assertion level; and
b) The results of the audit procedures, including those designed
to address the risk of management override of controls.
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Questions?
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