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Fraud and professional liability - Coggle Diagram
Fraud and professional liability
Two types of misstatements
Fraudulent FR
Improve financial results and position of the company
Usually, revenue recognition would be tested
Misappropriation of assets
Example, stealing cash or inventory
Auditor's responsibility
In order to discharge his liability, which is to obtain reasonable assurance that the FS are free from MM, due to fraud or error, auditors need to do these
Identify and assess the risk of MM due to fraud
Next is to obtain sufficient and appropriate audit evidence for the assessed risk of MM, though implementing and designing audit responses
To respond appropriately to fraud or suspected fraud
Management's tasks
Assess and identify risk of MM due to fraud
Auditor needs to enquire the management regarding this, that is the process of identifying and responding, the assessment of risk of MM due to fraud
Auditor should also assess how the process of identifying and responding to risk, is being communicated to TCWG and staffs
Auditor should obtain an understanding of how TCWG oversee management's process of identifying and responding to risks of MM, due to fraud
Auditor should obtain understanding on how management's process of implementing internal control
Fraud risk factors
Motive
Incentive or pressure to commit fraud
Opportunity
Perceived opportunity to commit fraud
Dishonesty
Ability or attitude to rationalise the fraudulent action
ISA 330
Auditor needs to consider overall responses to address the assessed risk of MM due to fraud and error at FS level
The following could be done to achieve above
Consider the assignment and supervision of personnel
Consider the selection and application of acc policies used by the entity
Incorporate an element of unpredictibility in the selection of the nature, timing and extent of audit procedures
ISA 240
Auditor may have to amend the nature, timing or extent of planned audit procedures to address assessed ROMM due to fraud or error at ASSERTION LEVEL
Therefore, the auditor should consider the following
Auditor procedures for management override of controls
Journal entries and other adjustments
Accounting estimates
Business rationale for significant transactions
Procedures when misstatements are discovered
The auditor evaluates the audit evidence, to ensure that it is consistent and it achieves its aim of answering the risks of fraud
The auditor must obtain written representations that management accepts its responsibility for the prevention and detection of fraud, and has made all relevant disclosures to auditors
However, when there is fraud, auditor should consider the reliability of written representation
The auditor should document
Significant decisions reached (audit team)
Identified and assessed ROMM due to fraud
The overall responses to assessed risks
Results of specific audit tests
Any communication with management
Communication
When fraud is identified or suspected, auditors should communicate to the appropriate level of management ASAP
Should communicate with TCWG if involve
Management
Employees who have significant roles in IC
Others where the fraud results in MM in the FS
To management and TCWG
Any deficiencies in the design or implementation of IC to prevent and detect fraud which have come to the auditor's attention
To regulators
If there is a legal duty
Auditor may have the statutory duty to report fraudulent behaviour to regulators outside the entity
If no legal duty
Auditor should consider whether doing so would breach their professional duty of confidence
In either case, auditors should take legal advice
Auditor's report
Confirm that the FS are MM due to fraud
Uncorrected fraud leading to MM
Qualified or adverse opinion
Unable to conclude that
Insufficient or inappropriate audit evidence
Qualified or disclaimer of opinion
Auditor's liability
Possible offence
Insider dealing
Tipped off client where a case of money laundering has been reported
Fail to report a money laundering activity
Negligence - fail to carry out duty with reasonable skill and care
To third parties
May arise if
An accountant does not know that their work will be relied on by a third party, BUT
Only knows that it is work of a kind which is liable in the ordinary course of events to be relied on by a third party
Limiting auditor's liability
Two types
Professional indemnity insurance (PII)
Insurance against civil claims made by clients and third parties arising from work undertaken by the firm.
Fidelity guarantee insurance
Insurance for any acts of fraud or dishonesty by partner, director, employee in respect of money or goods held in trust by the firm.
These do not actually restrict the auditor's liability but rather provide compensation if any liability arise
Importance of having insurance
Audit firms does not find itself with a liability that is too big to pay
The client can be compensated, even where the compensation is greater than the resource of the audit firm
Period of time cover
6 years after a member ceases to engage in public practice
Managing liability
Auditors may ensure they have good procedures over
Client acceptance
Quality control/ quality audits
Performance of audit work
Compliance with standards
Concerns that insurance claim might be bigger than the insurance coverage
Auditors should make agreements between them and their clients.
Two types
Proportionate liability
The claims are split between auditors and the directors of client company. This would require approval of shareholders
Capping liability
Maximum limit on the amount that the auditor would have to pay out under any claim
Expectation gap
Arise due to
Misunderstanding by the public of
Responsibilities of management and auditor
Scope of an audit
Difference in terms of expectations between those who rely on the work of auditors, and the actual work performed
Could be narrowed in two ways
Educating uses
In audit report and engagement letter, talk about responsibilities of each
Extending the auditor's responsibilities
Requiring auditors to report to boards and audit committee on the adequacy of controls to prevent and detect fraud
Encourage the use of targeted forensic fraud reviews
Increase the requirements to report suspected frauds