Showing posts with label Financial Statements. Show all posts
Showing posts with label Financial Statements. Show all posts

Friday, February 25, 2022

ISA (UK) 240: The auditor's responsibilities relating to fraud in an audit of financial statements

 Financial statement misstatements can result from either fraud or human error. The difference between fraud and error is whether the underlying conduct that causes the financial statements to be misstated is deliberate and involves deception or is unintentional. Although fraud is a broad legal notion, the auditor is concerned with fraud or suspected fraud that produces a material misstatement in the financial statements for the purposes of the ISAs (UK). The auditor is concerned with two sorts of intentional misstatements: those resulting from dishonest financial reporting and those originating from asset misappropriation.

Members of the audit committee should take an active part in preventing fraud by challenging management and auditors to verify that enough is being done to prevent and identify fraud throughout the organization. When financial crises make the news, the most pressing question is who bears blame and who could have stopped it. The auditing standard ISA 240 governs the auditor's responsibilities in relation to fraud, and many amendments have taken effect in both the UK and Ireland. In May 2021, the FRC issued a revised ISA (UK) 240 in response to the Brydon Review's recommendations to clarify auditor roles.

For auditors, what has changed?

-       Professional skepticism is getting more attention.

-       The significance of keeping vigilant and investigating further if conditions indicate that material submitted to auditors may not be real or has been tampered with is emphasized.

-       The auditor must evaluate both qualitative and quantitative elements of the fraud when determining whether it is material.

-       To undertake a risk assessment, audit methods, or evaluate evidence obtained, the audit team must examine whether specialist skills are required.

-       The audit team is likely to have more discussions, including exchanging ideas about how management or others within the entity could commit or hide fraud.

The ISA 240 modification was made in response to recent complaints that auditors aren't doing enough to uncover substantial fraud. It aims to clarify auditor responsibilities and place a greater emphasis on the auditor's role to look for suspected fraud. The auditor's job is to design and conduct an audit so that he or she may have reasonable assurance that the financial statements are free of serious misstatement due to fraud. This is a welcome clarification that will help auditors identify and analyze the risk of a significant misstatement as a result of fraud, as well as design processes to manage those risks.

 

Practice:

Both those charged with governance and management bear major responsibilities for fraud prevention and detection. It is critical that management, under the supervision of those charged with governance, place a high emphasis on fraud prevention, which may minimize possibilities for fraud, and fraud deterrence, which may encourage individuals not to commit fraud due to the risk of detection and punishment. This necessitates a commitment to cultivating a culture of honesty and ethical behavior, which can be maintained through active governance supervision.

Reference:     

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