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.
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