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SA 240: The Auditor's Responsibilities relating to Fraud in an Audit…
SA 240: The Auditor's Responsibilities relating to Fraud in an Audit of FS
Characteristics of Frauds & Errors
Can be relating to Fraudulent Financial Reporting or Misappropriation of Assets
May be MGT fraud or employee/third party fraud
Auditor may suspect but does not make legal determination of fraud
Frauds are more difficult to detect than errors
Auditor's Responsibilities
Responsible for obtaining RA
Not expected to detect frauds unless suspicion arises
Risk of not detecting a MM from fraud is higher than error
Risk of MM due to MGT fraud is greater than due to employee fraud
Maintaining attitude of professional skepticism
Definitions
Fraud
An intentional act by one or more individuals among MGT, TCWG, employees, or third parties
involving the use of deception to obtain an unjust or illegal advantage
.
Fraud Risk Factors (FRF)
Events or conditions that
indicate an incentive or pressure
to commit fraud or provide an opportunity to commit fraud.
Discussion amongst ET
Exchange of ideas among ET members
Consideration of earnings of MGT & practices followed that could lead to FFR
External & internal factors affecting the entity that may create an incentive or pressure
A consideration of MGT's involvement in overseeing employees w/ access to cash or other assets susceptible to misappropriation
Emphasis on importance of maintaining a proper state of mind throughout the audit
Unusual or unexpected changes in behaviour or lifestyle of MGT or employees
How an element of unpredictability will be incorporated in NTE of AP performed
Any allegation of frauds that have come to auditor's attention
Risk of MGT override of control
:star:
RAP and related activities
Auditor shall perform procedures to obtain info. for use in identifying ROMM due to fraud
Enquiries from MGT & others within the entity
MGT's assessment of risk
Process for identifying & responding to risk of fraud
MGT's communication, if any, with TCWG/employees
Frauds noticed during the year
Communications with Internal Auditor, if any
TCWG
Unless all of TCWG are involved in managing the entity
Auditor shall obtain an understanding of how TCWG exercises oversight of MGT's process
Unusual or unexpected relationships identified
Auditor shall evaluate unusual or unexpected relationships that have been identified in performing analytical procedures
Evaluation of FRF
An incentive or pressure to commit fraud
A perceived opportunity to commit fraud
An ability to rationalise the fraudulent action
Other information
Sall consider whether other info. obtained indicates ROMM due to fraud, like info. acquired during acceptance of audit
:star:
Response to Assessed Risk
Response at Overall level
Shall assign and supervise personnel as per their knowledge, skill and ability
Selection of accounting policies
Surprise check to incorporate unpredictability in NTE of AP
Response at Assertion level
Design and perform FAP whose NTE are responsive to assessed ROMM
Response to risk related to MGT override of control
Determine whether he needs to perform extra procedures to
Test appropriateness of JE
— inappropriate or unusual activity relating to processing of JE, adjustments made at year end
Review accounting estimate & judgements
— evaluate made by MGT indicating a possible bias, perform retrospective review
Significant transactions that are outside the normal course
of biz. and MGT has not discussed its biz. rationale
Evaluation of AE
Evaluate whether Analytical Procedures are consistent with auditor's understanding of entity
When the auditor identifies a misstatement
Evaluate whether fraud
Evaluate implications on other aspects
Re-evaluate assessment of ROMM due to frauds and its resulting impact on NTE of FAP
:star:
Auditor unable to continue the engagement
Determine the professional and legal responsibility to report to the person who had appointed him
Consider whether it is appropriate to withdraw from the engagement
If the auditor withdraws
Discuss with the appropriate level of MGT or TCWG
Determine whether there is a professional or legal requirement to report to appointing/regulatory authority
Communication of Fraud
To MGT/TCWG — fraud/identification of fraud on timely basis to appropriate level
To Regulatory & Enforcement Authorities — legal resp. may override duty of confidentiality in some cases
:star::star:
Fraud Risk Factors
Fraudulent Financial Reporting
Incentive/Pressure
Financial stability or profitability is threatened
Excessive pressure to perform
Personal financial situation
Opportunity
Nature of industry/entity's operations
Monitoring of MGT is not effective
Complex or unstable org. structure
IC components are deficient
Attitudes/Rationalisation
Communication, implementation, support, or enforcement of entity's values
MGT practice of making large commitments
Low morale/initiative among senior MGT
Misappropriation of Assets
Incentive/Pressure
Personal financial obligation
Adverse relationship between employees w/ access to cash
Opportunity
Inadequate IC over assets may increase susceptibility of misappropriation
Nature of biz. activity/exposure to assets highly susceptible to misappropriation
Attitude/Rationalisations
Disregard for need of monitoring/IC over misappropriation
Behaviour indicating displeasure/dissatisfaction
Changing behaviour or lifestyle
AP to address assessed ROMM due to FFR/MOA at assertion level
Visiting locations
Altering audit approach in CY
Conducting interviews of personnel
Investigating sig. and unusual transactions
Discuss with other independent auditor
Performing certain tests on surprise basis
Performing detailed review of entity's quarter end/year end adjustments
Testing of integrity of computer produced records/transactions
If work of expert becomes significant, perform additional procedures
Performing AP to analyse selected op. bal., accounts of previous audited FS to assess how certain issues were resolved
Performing computer-assisted techniques
Seeking additional AE form outside the entity
Requesting that inventories be counted at EOY
Evaluation of AE — Circumstances indicating possibility of fraud
Discrepancies in accounting records
Transactions not recorded in complete/timely manner
Unauthorised balances
Last minute adjustments
Evidence of employee's access to system and records inconsistent with duties
Tips or complaints received
Conflicting/missing evidences
Missing docs.
Altered docs.
Photocopied docs.
Sig. unexplained items
Unusual BS changes
Unusual discrepancies between entity's records & confirmation replies
Missing cancelled cheques
Missing inventory/physical assets
Problematic/unusual relationship between auditor & MGT
Denial of access to records/facilities
Undue time pressure
Complaints by MGT regarding audit/EP
Unusual delay
Denial of access to key IT operations
Unwillingness to address identified deficiencies
Others
Unwillingness by MGT to permit auditor to meet privately with TCWG
Accounting policies in variance with industry norms
Frequent changes in accounting estimates
Tolerance of violations on entity's code of conduct
Specific Responses — Misstatement due to Misappropriation of Assets
Counting cash/securities at or near EOY
Confirm directly with customer the account activity
Analysing recoveries of written-off accounts
Analysing inventory shortages by location
Comparing key inventory ratios to industry norms
Reviewing supporting docs.
Performing a computerised search of payroll records
Review of personnel files for those containing no or little evidence
Analysing sales discounts and returns for unusual patterns or trends
Confirming specific terms of contracts with third parties
Reviewing the property of large and unusual expenses
Reviewing authorisations and carrying value of senior MGT and RPT loans
Reviewing level and propriety of expense reports submitted by senior MGT
:memo:
Primary responsibility for prevention & detection of fraud rests with both MGT and TCWG.