ISA 240 (Redrafted) - Auditors and Fraud _ ACCA Qualification _ Students _ ACCA Global

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3/3/2015 ISA240(Redrafted)AuditorsandFraud|ACCAQualification|Students|ACCAGlobalhttp://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/f8/technicalarticles/isa240.html 1/3Home > Students > ACCAQualificationStudentJourney > Qualificationresources > ACCAQualification > F8AuditandAssurance > TechnicalarticlesISA 240 (REDRAFTED) - AUDITORS AND FRAUDRELATED LINKSStudentAccountanthubpageRELEVANTTOACCAQUALIFICATIONPAPERSF8andP7ThisarticleexaminesthedefinitionsgivenbyInternationalStandardonAuditing(ISA)240(Redrafted)offraudanderror,andthehistoricalexpectationsoftheauditrole.Italsodefinestheextentofauditorresponsibilitiesforthepreventionanddetectionoffraud,includingtheneedforprofessionalscepticismanddiscussionamongtheengagementteam.ThearticlethensummarisesthekeyriskassessmentproceduresrequiredofauditorsbyISA240(Redrafted),andconcludesthatthetraditionalwatchdognotbloodhoundphilosophyregardingtheextentofauditorresponsibilitiesforfrauddetectionisnolongervalidinthecontextoftherequirementsoftheredraftedISA.Fraudisahighlycontroversialarea,andtheextentofauditorresponsibilityforthepreventionanddetectionoffraudhasgeneratedconsiderablediscussioninrecentyears.Thisarticleaimstosummarisethecurrentextentofauditorresponsibilitiesforfraud,aspertherequirementsofISA240(Redrafted),TheAuditorsResponsibilitiesRelatingtoFraudinanAuditofFinancialStatements.ISA240(Redrafted)wasissuedinDecember2006andiseffectiveforauditsoffinancialstatementsforperiodsbeginningonorafter15December2008.TheInternationalAuditingandAssuranceStandardsBoard(IAASB)ClarityProjectwaslaunchedin2004inordertoencouragegreateruseofitsstandardsandtofacilitatetheprocessoftranslationofstandardsintootherlanguages.ISA240isdescribedbytheIAASBHandbook(reference1)asredraftedbecauseithasbeenrevisedinthepastfewyearsandisnotinneedoffurtherrevisionbytheClarityProject.Asaresult,theclarifiedversionofISA240isthesameastheredraftedversion.SeetheIAASBHandbook,andthesectionBackgroundInformationontheClarityProjectoftheIAASBforfurtherdetails(reference2).BACKGROUNDThetraditionalpassivephilosophytowardsauditorresponsibilityforfrauddetectioniswellsummarisedbytheLordJusticeLopesruling,intheUK,giveninthe1896KingstonCottonMillcase(reKingstonCottonMillCompany(No.2)):Anauditorisnotboundtobeadetective,ortoapproachhisworkwithsuspicion,orwithaforegoneconclusionthatthereissomethingwrong.Heisawatchdog,notabloodhound.(Reference3).WatchdogsandBloodhounds(below)givesformaldefinitionsofawatchdogandabloodhound.Clearly,auditinghaschangedconsiderablysince1896,althoughauditorresponsibilityforfrauddetectionhasremainedalowpriority.Wenowconsidertherequirementsoftherecentlyrevisedauditstandardregardingtheroleoftheauditorandfrauddetection,andthenformaconclusionaboutthecurrentextentofauditorresponsibilityforfrauddetection.THEDIFFERENCEBETWEENFRAUDANDERRORThekeydistinguishingfactorbetweenfraudanderroriswhethertheunderlyingactionthatresultsinamisstatementofthefinancialstatementsisintentionalorunintentional.Thetermfraudisabroadlegalconcept,buttheauditorisconcernedwithfraudthatcausesamaterialmisstatementinthefinancialstatements.ISA240(Redrafted)definesfraudas:Anintentionalactbyoneormoreindividualsamongmanagement,thosechargedwithgovernance,employees,orthirdparties,involvingtheuseofdeceptiontoobtainanunjustorillegaladvantage.ISA240(Redrafted),paragraph11.Thetwotypesoffraudmostrelevanttotheauditor,accordingtoISA240(Redrafted),aremisstatementsarisingfromfraudulentfinancialreporting,andmisstatementsarisingfromthemisappropriationofassets.Bywayofcontrasttofraud,thetermerrorreferstoanunintentionalmisstatementinfinancialstatements,includingtheomissionofanamountoradisclosure.ISA240(Redrafted)says:Thedistinguishingfactorbetweenfraudanderroriswhethertheunderlyingactionthatresultsinthemisstatementofthefinancialstatementsisintentionalorunintentional.ISA240(Redrafted),paragraph2.MYACCA HOME WORKFORUS TECHNICALACTIVITIES HELP&SUPPORT GLOBALSITE3/3/2015 ISA240(Redrafted)AuditorsandFraud|ACCAQualification|Students|ACCAGlobalhttp://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/f8/technicalarticles/isa240.html 2/3Theemphasisofthisarticleisonfraud,becausefraudresponsibilitiesaremorecontroversialthanerror.Fraudmayinvolvesophisticatedandcarefullyorganisedschemes,designedtoconcealfraudulentactivity,suchasforgery,deliberatefailuretorecordtransactions,orintentionalmisrepresentationsbeingmadetotheauditor.However,inordertobetterunderstanderror,moreconsiderationofinternalcontroleffectivenessisrequired.ISA240(REDRAFTED)ANDRESPONSIBILITIESFORFRAUDISA240(Redrafted)makesitclearwhohasthemainresponsibilityforthepreventionanddetectionoffraud:Theprimaryresponsibilityforthepreventionanddetectionoffraudrestswithboththosechargedwithgovernanceoftheentityandmanagement.ISA240(Redrafted)paragraph4.ISA240(Redrafted)alsogoesontostate,however,that:AnauditorconductinganauditinaccordancewithISAsisresponsibleforobtainingreasonableassurancethatthefinancialstatementsasawholearefreefrommaterialmisstatement,whethercausedbyfraudorerror.ISA240(Redrafted),paragraph5.Hence,boththeentityitselfandtheauditorshaveresponsibilitiesforfraudanderror.Itcouldbesaidthatmanagement,andthosechargedwithgovernance,havetheprimaryresponsibilityforfraudanderror,whereastheauditorhasasecondaryresponsibility.Itisimportant,however,toensurethattheextentofthesesecondaryresponsibilitiesareclearlyunderstood,whichistheareadiscussedintherestofthisarticle.PROFESSIONALSCEPTICISMISA200(RevisedandRedrafted),OverallObjectiveoftheIndependentAuditorandtheConductofanAuditinAccordancewithISAs,requirestheauditortomaintainanattitudeofprofessionalskepticism:Theauditorshallplanandperformanauditwithprofessionalskepticism,recognisingthatcircumstancesmayexistthatcausethefinancialstatementstobemateriallymisstated.ISA200(RevisedandRedrafted),paragraph15.ISA200(RevisedandRedrafted)describesprofessionalskepticismas:Anattitudethatincludesaquestioningmind,beingalerttoconditionswhichmayindicatepossiblemisstatementduetoerrororfraud,andacriticalassessmentofauditevidence.ISA200(RevisedandRedrafted),paragraph13(l).ISA240(Redrafted)furtherrequiresthat:Theauditorisresponsibleformaintaininganattitudeofprofessionalskepticismthroughouttheaudit.ISA240(Redrafted),paragraph8.Professionalskepticismisofkeyimportancetotheaudit,forexamplerequiringauditorstobealertto:auditevidencecontradictingotherevidenceinformationquestioningevidencereliabilityconditionsthatmayindicatepossiblefraudcircumstancesthatsuggesttheneedforauditproceduresinadditiontothoserequiredbytheISAs.DISCUSSIONAMONGTHEENGAGEMENTTEAMISA240(Redrafted)referstotherequirementinISA315(Redrafted),IdentifyingandAssessingtheRisksofMaterialMisstatementThroughUnderstandingtheEntityanditsEnvironment,thatmembersoftheengagementteamdiscussthesusceptibilityoftheentitysfinancialstatementstomaterialmisstatementduetofraud.ISA240(Redrafted)requiresthat:Thisdiscussionshallplaceparticularemphasisonhowandwheretheentitysfinancialstatementsmaybesusceptibletomaterialmisstatementduetofraud,includinghowfraudmightoccur.ISA240(Redrafted),paragraph15.Ordinarily,thekeymembersoftheengagementteamshouldbeinvolvedinthediscussion,andtheengagementpartnershouldthenconsiderwhichmattersaretobecommunicatedtothoseintheteamnotinvolvedinthediscussion.Discussionisexpectedtooccurwithaquestioningmind,settingasideanybeliefsheldbytheengagementteammembersthatthemanagementandthosechargedwithgovernancearehonestandhaveintegrity.Interestingly,thisdiscussionisalsoexpectedtoincludeaconsiderationofhowanelementofunpredictabilitywillbeincorporatedintothenature,timing,andextentoftheauditprocedurestobeperformed.ISA240(REDRAFTED)RISKASSESSMENTPROCEDURESISA240(Redrafted)requiresthattheauditorperformsriskassessmentprocedurestoobtaininformationforuseinidentifyingtherisksofmaterialmisstatementduetofraud.Paragraphs17to24ofISA240(Redrafted)outlinetherequiredriskassessmentprocedures,whicharesummarisedintheRiskAssessmentProceduresboxbelow.CONCLUSIONTheredraftingofISA240hasallowedforatimelyreviewofauditresponsibilitiesrelatingtofraud.It3/3/2015 ISA240(Redrafted)AuditorsandFraud|ACCAQualification|Students|ACCAGlobalhttp://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/f8/technicalarticles/isa240.html 3/3Lastupdated:22Sep2014shouldbenoted,however,thatthereareminordifferencesofemphasisbetweentherequirementsofISA240(Redrafted)andthecurrentrequirementsofISA(UKandIreland)240TheAuditorsResponsibilitytoConsiderFraudinanAuditofFinancialStatements,whichbecameeffectiveforperiodscommencingonorafter15December2004.AccordingtoISA240(Redrafted)thedifferencebetweenfraudanderrordependsuponwhetherdeceptionhasbeenused,andthedistinctionbetweentheresponsibilitiesofthosechargedwithgovernanceandauditorsforfraudpreventioncanbedescribedrespectivelyasprimaryandsecondaryresponsibilities.Auditorsarerequired,however,tomaintainanattitudeofprofessionalskepticismthroughouttheaudit,andmembersoftheauditengagementteamarerequiredtodiscussthesusceptibilityoftheentitysfinancialstatementstomaterialmisstatementduetofraud.ISA240(Redrafted)requiresauditorstoperformriskassessmentprocedurestoobtaininformationforuseinidentifyingtherisksofmaterialmisstatementduetofraud.Finally,itcanbeconcludedthattodescribetheauditroleasthatofawatchdog,notabloodhoundisnolongervalidinthecontextoftherequirementsoftheredraftedandrevisedISAsthesenegatethetraditionalpassivephilosophytowardsauditorresponsibilityforfrauddetection,markingasignificantshiftawayfromamonitoringroleandtowardstherequirementforaverykeensenseofsmell.WrittenbyaPaperF8exampanelmemberREFERENCES1. HandbookofInternationalAuditing,Assurance,andEthicsPronouncements,PartII,IAASB,2008Edition.2. BackgroundInformationontheClarityProjectoftheInternationalAuditingandAssuranceStandardBoard,2008Edition,pages1to4,inPartIIofHandbookofInternationalAuditing,Assurance,andEthicsPronouncements,IAASB,2008Edition.3. LordJusticeLopes,TheLawTimes,VolumeLXXIV,CourtofAppeal,11July1896,quotedinSarupD,WatchdogorBloodhound?ThePushandPullTowardsaNewAuditModel,InformationSystemsControlJournal,Volume1,2004.4.OxfordEnglishDictionary,www.askoxford.comSHARE THIS PAGE

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