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AUDITOR’S
RESPONSIBILITY
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• Auditor’s Responsibility is to designthe udit to pro!ide resonblessurn"e o# dete"ting $teril
$isstte$ents in the %nn"ilstte$ents
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• The $isstte$ents $y e$nte
#ro$&
• '( Error
•
)( *rud• +( Non"o$plin"e ,ith L,s nd
Regultions
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ERRORRe#ers to unintentionl
$istte$ents in the%nn"il stte$ents
In"luding the o$ission o#n $ount or dis"losure
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ERRORS ARE&•
-the$ti"l or "leri"l $ist.es in theunderlying re"ords nd ""ounting dt
• An in"orre"t ""ounting esti$te rising #ro$
o!ersight or $isinterprettion o# #"ts
• -ist.e in the ppli"tion o# ""ounting poli"ies
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*RAUD
/re#ers to intentionl "t by one or$ore indi!iduls $ong $nge$ent
/ Those "hrged ,ith go!ernn"e0e$ployees0 or third prties0 in!ol!ingthe use o# de"eption to obtin nun1ust or illegl d!ntge(
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*RAUD•
Auditor is pri$rily "on"erned ,ith&
#rudulent "ts tht "use $teril$isstte$ent in the %nn"il stte$ents
Types o# *rud
'( *rudulent %nn"il reporting
)( -ispproprition o# ssets ore$ployees #rud
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SYSTE-
O*2UALITY 3ONTROL
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'( *rudulent %nn"il reporting/
in!ol!es intentionl$isstte$ents or o$issions o#$ounts or dis"losures in the
%nn"il stte$ents to de"ei!e%nn"il stte$ent users
/ .no,n s $nge$ent #rud
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-nge$ent *rud in!ol!es&
'( -nipultion0 #lsi%"tion orltertion o# re"ords or do"u$ents
)( -isrepresenttion in or intentionl
o$ission o# the e4e"ts o#trns"tions #ro$ re"ords ordo"u$ents
+( Re"ording o# trns"tions ,ithoutsubstn"e
5( Intentionl $isppli"tion o#
""ounting poli"ies
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• *inn"il stte$ent #rud – is deliberte $isrepresenttion0 $isstte$ent or
o$ission o# %nn"il stte$ent dt #or the purposeo# $isleding the reder nd "reting #lsei$pression o# n orgni6tion7s %nn"il strength(
– Publi" nd pri!te businesses "o$$it %nn"il
stte$ent #rud to se"ure in!estor interest or obtinbn. ppro!ls #or %nn"ing0 s 1usti%"tion #orbonuses or in"resed slries or to $eete8pe"ttions o# shreholders(
– Upper $nge$ent is usully t the "enter o#
%nn"il stte$ent #rud be"use %nn"ilstte$ents re "reted t the $nge$ent le!el(
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-ethods
*inn"il stte$ent #ruds #ll into generl"tegories( These in"lude
( i$proper re!enue re"ognition0
b( $nipultion o# libilities0
"( $nipultion o# e8penses0
d( i$proper dis"losures on %nn"ilstte$ents nd
e( o!erstting ssets
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I$proper Re!enue Re"ognition
• The $ost "o$$on s"he$e used in %nn"il stte$ent #rud in!ol!es$nipultion o# re!enue %gures(
• A""ording to sur!ey by Deloitte o# A""ounting nd Auditing
En#or"e$ent Releses 9AAER: %led by the SE3 #ro$ );;; through);;<0 i$proper re!enue re"ognition ,s re"ogni6ed s the s"he$ee$ployed in +< per"ent o# the 5;+ "ses studied(
•
S"he$es to $nipulte re!enue %gures typi"lly in!ol!e postingsles be#ore they re $de or prior to py$ent(
• E8$ples in"lude re"ording produ"t ship$ents to "o$pny/o,ned#"ilities s sles0 re/in!oi"ing pst due ""ounts to i$pro!e the geo# re"ei!bles0 pre/billing #or #uture sles nd dupli"te billings
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-nipulting E8penses
• Another #rud in!ol!ing %nn"il stte$ents is the deliberte$nipultion o# e8penses(
• The Deloitte sur!ey o# AAER %lings by the SE3 sho,s tht ') per"entin!ol!ed e8pense $nipultion nd < per"ent $nipultion o# libilities(
• An e8$ple o# $nipulting e8penses is to "pitli6e nor$l operting
e8penses( This s"he$e is n i$proper $ethod to dely re"ognition o# thee8pense nd rti%"illy rise in"o$e %gures(
• An e8$ple o# this type o# s"he$e is the >orld3o$ s"ndl0 ,here
signi%"nt operting e8penses ,ere listed s "pitl on the bln"e sheet(
• 3on"el$ent nd $nipultion o# libilities #ruds in"lude #ilure to re"ord""ounts pybles or report regulr e8penses on %nn"il stte$ents(?eeping "ertin libilities0 le!ing notes or lons o4/the/boo.s nd ,ritingo4 $oney lent to e8e"uti!es re lso "o$$on $ethods o# #rud(
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I$proper Dis"losures
•
Dis"losure #ruds re "o$$only bsed on$isrepresenting the "o$pny nd $.ing#lse representtions in press releses ndother "o$pny %lings(
•
-.ing #lse stte$ents in the "o$$entryse"tions o# nnul reports o# otherregultory %lings re nother sour"e #ori$proper dis"losures(
• So$e dis"losures $ight be intentionlly"on#using or obs"ure nd i$possible to"o$pletely understnd
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• )( -ispproprition o# ssets or
e$ployee #rud – In!ol!es the#t o# n entity’s ssets
"o$$itted by the entity’s e$ployees
This in"ludes&
( E$be66ling re"eiptsb( Steling entity’s ssets su"h s "sh0
$r.etble se"urities0 nd in!entory
"( Lpping o# ""ounts re"ei!ble
Note& o#ten ""o$pnied by #lse or$isleding re"ords or do"u$ents in order to"on"el the #"t tht the ssets re $issing
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• O!erstting Assets
O!erstte$ent o# "urrent ssets on%nn"il stte$ents nd #ilure to
re"ord depre"ition e8penses re o#tene$ployed s $ethods o# #rud(
O!erstte$ent o# in!entory nd""ounts re"ei!bles re lso"o$$only used to in@te "o$pnyssets on #rudulent stte$ents
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• *rud in!ol!es
– -oti!tion to "o$$it it
– A per"ei!ed opportunity to do so
Distinguish *rud #ro$ Error
/ >hether the underlying "use o#$isstte$ent in the %nn"il stte$ents
is intentionl or unintentionl(
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Responsibility o# -nge$ent nd Those"hrged ,ith go!ernn"e
– -nge$ent to estblish "ontrolen!iron$ent nd to i$ple$ent internl"ontrol poli"ies nd pro"edures designedto ensure the dete"tion nd pre!ention o##rud(
–
Indi!iduls "hrged ,ith go!ernn"e o# nentity to ensure the integrity o# n entity’s""ounting nd %nn"il reporting syste$nd tht pproprite "ontrols re in pl"e(
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Auditor’s Responsibility
-
To design the udit to obtin resonblessurn"e tht the %nn"il stte$entsre #ree #ro$ $teril $isstte$ent,hether "used by error or #rud(
Plnning Phse '( Auditor should $.e inuiries o# $nge$ent boutthe possibility o# $isstte$ent due to #rud or error&
( -nge$ent s ssess$ent o# ris. due to #rud
b( 3ontrols estblished to ddress the ris.s"( Any $teril error or #rud tht hs 4e"ted the
entity or suspe"ted #rud tht the entity isin!estigting(
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• )( Auditor should ssess the ris. tht
#rud nd error $y "use the *S to"ontin $teril $isstte$ents
•
PAS )5; reuires the uditor tospe"i%"lly Cassess the risk ofmaterial misstatements due to fraud
and consider that assessment indesigning the audit procedures to be performed”
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*rud ris.s #"tors
- Identi#y e!ents or "onditions thtpro!ide n opportunity
- A $oti!e or $ens to "o$$it #rud
- Indi"te tht #rud $y lredy h!eo""urred
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• Auditor’s Pro#essionl 1udg$ents $y bein@uen"ed & – The uditor $y ppro"h the udit ,ith
heightened le!el o# pro#essionl s.epti"is$
– The uditor’s bility to ssess "ontrol ris. tless thn high le!el $y be redu"ed nd heshould be sensiti!e to the bility o# the$nge$ent to o!erride "ontrols
– The udit te$ $y be sele"ted in ,ys thtensure tht the .no,ledge0 s.ill nd bility o#personnel ssigned signi%"nt responsibilitiesre "o$$ensurte ,ith the uditor’sssess$ent o# ris.
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/ The uditor $y de"ide to"onsider $nge$ent sele"tion ndppli"tion o# signi%"nt ""ounting
poli"ies0 prti"ulrly those relted toin"o$e deter$intion nd sset!lution(
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Testing Phse
• +( During the "ourse o# the udit0 theuditor $y en"ounter "ir"u$stn"estht $y indi"te the possibility o# #rud
or error
• 5( A#ter identi#ying $teril $isstte$ent
in the *S• Resulted #ro$ #rud or n error(
• Errors ,ill result to d1ust$ents o# *S
• *rud $y h!e other i$pli"tions on n udit
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Not -teril e4e"t o# *rud
• Auditor should
– Re#er the $tter to pproprite le!el o#$nge$ent
– Be stis%ed tht0 the #rud hs no otheri$pli"tions #or other spe"ts o# theudit nd tht those i$pli"tions h!ebeen deutely "onsidered
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-teril e4e"t o# the *rud or
unble to e!lute
• The Auditor should&
/ "onsider i$pli"tion #or otherspe"ts o# the udit prti"ulrly therelibility o# $nge$entrepresenttion
/ dis"uss the $tter nd the
ppro"h to #urther in!estigtion ,ithn pproprite le!el o# tht is t lestone le!el bo!e those in!ol!ed
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• / tte$pt to obtin e!iden"e todeter$ine ,hether $teril #rudin #"t e8ists nd i# so their e4e"ts
nd
• Suggest tht the "lient "onsult ,ith
legl "ounsel bout uestion o# l,
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3O-PLETION PASE
• ( The uditor should obtin ,rittenrepresenttion #ro$ the "lient’s$nge$ent tht
– It ".no,ledge the responsibility #or thei$ple$enttion nd opertion o#
""ounting nd internl "ontrol syste$tht re designed to pre!ent nd dete"t#rud nd error
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– It belie!es the e4e"ts o# those un"orre"ted%nn"il stte$ents ggregted by the
uditor during the udit re i$$teril to the*S t.en s ,hole
– It hs dis"losed to the uditor ll signi%"nt
#"ts relting to #ruds or suspe"ted #ruds.no,n to $nge$ent tht $y h!e4e"ted the entity
– It hs dis"losed to the uditor the results o#its ssess$ent o# the ris. tht the *S $y be$terilly $isstted s result o# #rud(
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3O-PLETION PASE
• F( -teril Errors or #rud e8ist
– e should reuest the $nge$ent tore!ise the *S0 other,ise he ,ill e8press
uli%ed or d!erse opinion
G( Unble to e!lute the e4e"t o# #rud
on the *Sbe"use o# li$ittion o# s"ope0 he
should either uli#y or dis"li$ hisopinion on the *S
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Non"o$plin"e ,ith L,s nd
Regultions
• Non"o$plin"e
– Re#ers to "ts o# o$ission or "o$$ission bythe entity being udited0 either intentionl orunintentionl0 ,hi"h re "ontrry to thepre!iling l,s or regultions(
– In"ludes trns"tions entered into by or in then$e o# 0 the entity or on its behl# by its$nge$ent or e$ployees(
E8$ple& T8 e!sion0 !ioltion o#en!iron$entl prote"tion l,s0 inside trding o#se"urities
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-nge$ent’sResponsibilities
• PAS );
– The responsibility #or the pre!ention nddete"tion o# non"o$plin"e rests ,ith
$nge$ent
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*ollo,ing poli"ies ndpro"edures
• -onitoring legl reuire$ents ndensuring tht operting pro"eduresre designed to $eet these
reuire$ents
• Instituting nd operting pproprite
syste$ o# internl "ontrol
• De!eloping0 publi"i6ing nd #ollo,ing 3ode o# 3ondu"t
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• Ensuring e$ployees re properlytrined nd understnd the 3ode o#
3ondu"t• -onitoring "o$plin"e ,ith the 3ode
o# 3ondu"t nd "ting ppropritely
to dis"ipline e$ployees• Engging legl d!isors in $onitoring
legl reuire$ents
•
-intining register o# signi%"ntl,s ,ith ,it"h the entity hs to"o$ply ,ithin its prti"ulr industrynd re"ord o# "o$plins
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Auditor’s Responsibility
• Plnning Phse
– ' Obtin generl understnding o# thelegl nd regultory #r$e,or.
ppli"ble to the entity(
– )( Design pro"edures to help identi#y
instn"es o# non"o$plin"e ,ith thosel,s nd regultions ,herenon"o$plin"e should be "onsidered,hen prepring *S
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• +( Design udit pro"edures to obtinsuH"ient pproprite udit e!iden"ebout "o$plin"e ,ith those l,s
nd regultions generlly re"ogni6edby the uditor
• E4e"t on the deter$intion o# $teril$ounts nd dis"losures in *S