Accounting fraud has long been the
buzzword in the industry due to its wider and deeper implications on the
company, industry and the economy at large. Window dressing is a term used in
accounting for presenting financial statements in such a manner that disguise
the actual financial transactions and present them in a more favorable way.
According to PWC Economic crime survey the five most commonly reported
types of economic crimes are asset misappropriation, procurement fraud, bribery
and corruption, cybercrime and accounting fraud.
Auditors are required to keep
themselves up to date about all these fraudulent practices and should apply
professional skepticism while conducting the audit of financial statements.
ISA 240, The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements addresses
all the issues which an auditor has to deal with while conducting the audit. Under
ISA-240, auditors are now required to evaluate the effectiveness of an entity’s
risk management framework (internal control) in preventing misstatements
whether through fraud or otherwise, in all audits. Furthermore, auditors are
now required to be more proactive in their search for fraud. The auditor is
responsible for maintaining an attitude of professional skepticism throughout
the audit, recognizing the possibility that a material misstatement due to fraud
could exist, notwithstanding the auditor’s past experience of the honesty and integrity
of the entity’s management and those charged with the governance. An overriding
requirement of ISA 240 is that auditors are aware of the possibility of there being
misstatements due to fraud.
The objectives of the
auditor are:
a) To identify and assess
the risks of material misstatement of the financial statements due to fraud;
b) To obtain sufficient
appropriate audit evidence regarding the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate
responses; and
c) To respond appropriately
to fraud or suspected fraud identified during the audit.
The ISA, however, recognize
the fact that owing to inherent limitation of an audit, there is an unavoidable
risk that some material misstatements of the financial statements may not be
detected, even though the audit is properly planned and performed in accordance
with the ISAs.
Practice
Misstatements in the
financial statements can arise from either fraud or error. The distinguishing
factor between fraud and error is whether the action that results in the
misstatement of the financial statements is intentional or unintentional. In planning the audit, auditors must be alert to the
possibility of fraud and assess the risk that fraud might occur. The
auditor shall treat those assessed risks of material misstatement due to fraud
as significant risks and accordingly, the auditor shall obtain an understanding
of the entity’s related controls, including control activities, relevant to
such risks.
